If you’ve recently made the jump into self-employment or started your own small business, congratulations! Along with the freedom and flexibility of running your own venture comes a new level of responsibility — especially when it comes to taxes.
Unlike employees, whose taxes are automatically deducted from their paycheques, self-employed individuals must calculate and remit their own taxes. Once your business reaches a certain level of profitability, you may also be required to make income tax instalments—essentially periodic payments toward the income taxes and sales taxes you’ll owe when you file your return. Understanding how and when to make these payments can help you avoid penalties and keep your business finances healthy.
What Are Instalment Payments?
An instalment is simply a pre-payment of taxes based on your estimated income for the year. If you’re self-employed, whether as a sole proprietor, freelancer, or unincorporated business owner—you are responsible for staying on top of your tax obligations, even though your income might fluctuate from month to month.
Because estimating your income (and therefore your tax bill) can be tricky, especially when you’re just starting out, the Canada Revenue Agency (CRA) and Revenu Québec require advance payments in the form of instalments to help spread your tax liability throughout the year.
Types of Instalments You May Owe
Depending on your business and location, you might need to make instalments for:
- Federal and provincial/territorial income taxes
- GST/HST (Goods and Services Tax / Harmonized Sales Tax)
- QST (Quebec Sales Tax), if you’re in Quebec
When Do You Need to Start Making Instalments?
In general, you’ll be required to pay income tax instalments if:
- You owed more than $3,000 in federal taxes in the previous year (or $1,800 if you live in Quebec), and
- You expect to owe a similar amount in the current year.
For GST/HST or QST, instalments are required if your net tax owing exceeded $3,000 in the previous year.
If you’re in your first year of business, you’re typically exempt from making instalments—since there’s no prior tax history to base them on.
How Are Income Tax Instalments Calculated?
There are three options for calculating your instalments:
1. No-Calculation Option
This is the simplest method. CRA calculates your instalments based on your most recent tax return. If your income and deductions are stable year-to-year, this is a convenient way to stay on track. CRA sends instalment reminders with the suggested payment amounts, and you can also find this info in your CRA My Account.
2. Prior-Year Option
If you expect your current year’s income to be similar to last year’s (but different from the year before that), you can calculate your instalments based on last year’s tax owing. Simply divide your total tax bill by four and pay that amount quarterly.
Example: If you owed $10,000 in taxes for 2023, then you’d pay $2,500 every quarter in 2024.
3. Current-Year Option
If you expect your business income or deductions to be significantly different this year, this option lets you estimate your instalments based on your current year’s expected income.
Example: If your estimated net income is $75,000 and your average tax rate is 35%, your annual tax would be $26,250. Divide that by four to get $6,562.50 per quarter.
Use a reliable online tax calculator each quarter to adjust your estimates as your income fluctuates.
GST/HST and QST Instalments
If your GST/HST (or QST in Quebec) liability was more than $3,000 last year, you’ll need to pay instalments quarterly.
How it works: Just divide last year’s GST/HST or QST payable by four. For example, if you owed $6,000 in GST/HST last year, your instalments would be $1,500 per quarter.
Instalment Due Dates
Here are the key due dates to mark in your calendar:
Income Tax Instalments (Federal & Provincial):
- March 15
- June 15
- September 15
- December 15
GST/HST and QST Instalments:
- April 30
- July 31
- October 31
- January 31
What Happens If You Don’t Pay Instalments?
If you fail to make the required instalment payments—or your instalments are too low—you may face interest charges or penalties.
- CRA charges interest on late or insufficient payments at a prescribed rate (currently around 9%).
- Revenu Québec charges interest daily, and if your payment is less than 75% of what’s required, they can apply an additional 10% penalty per year.
These costs are not tax-deductible, so it’s best to avoid them by planning ahead.
Helpful Tips for Managing Instalments
- Start Early: Even if you’re not yet required to pay instalments, get in the habit of setting money aside for taxes.
- Use Online Tools: CRA provides instalment calculation worksheets, and tax calculators can help you estimate accurately.
- Track Everything: Good bookkeeping is essential. Use accounting software, like Xero, to monitor income, expenses, and taxes owed.
- Pay Online: Instalments can be paid through online banking, the CRA’s My Payment service, or using the remittance slips CRA and Revenu Québec send you.
- Adjust Quarterly: Reassess your income each quarter and adjust your instalment payments if necessary.
Final Thoughts
Moving from employee to entrepreneur means taking full ownership of your financial responsibilities, including taxes. Instalment payments are a key part of running a financially healthy small business. They help you stay on top of your tax obligations, avoid surprise bills at year-end, and prevent costly penalties.
If you’re not sure how much to pay or which calculation method is best, consider speaking with a professional bookkeeper. A bit of planning now can save you a lot of stress—and money—later.
