The question of whether you are an employee or self-employed is a very important question to answer. As an employee, you have a limited number of tax deductions available to you.
On the other hand, self-employed people are businesses and have access to a greater range of tax deductions and are better able to engage in tax planning.
Becoming self-employed or an independent contractor is not a simple matter of changing your relationship with your employer. And whether you are an employee or self-employed may not be clear particularly if you receive the bulk of your income from a single source.
If you are considering entering to an arrangement where you are uncertain if you are an employee or self-employed, you can request the CRA to provide a ruling to have your status determined. Use the CRA form CPT1 to request the CRA to look at your situation. It is also strongly suggested that you obtain independent professional advice.
Factors to Consider
There are four interrelated factors that must be considered is determining your status.
1. Control: If you are in control over when and how the work is done and work independently to get the job done, then you may be considered self-employed. Indicators that you may be self-employed are:
- You work independently.
- No one is overseeing your work.
- You choose when and for whom you work. You could work for multiple simultaneously.
- You choose to accept or reject work from the client.
2. Integration: Is the work you perform part of the organizations composition? Typically, self-employed persons are less integrated into businesses operations.
3. Risk: Self-employed individuals will have a grater degree of business and financial risk, a higher degree of legal liability, and are responsible for their own expenses.
4. Tools & Equipment: Self-employed individuals will normally be responsible for providing the tools of employment and will also be responsible for the maintenance and upkeep of the equipment as well as retaining title and ownership of the equipment.
Risks of Self-Employment
From a tax planning perspective it is always better to arrange your affairs so that you are self-employed. However, there are a number of risks that you should take into account before hand:
- You will not normally participate in company benefit programs,
- There is no employment insurance if you do not work,
- Your Canada Pension Plan premium is double,
- You will not normally have a severance package,
- You will have legal liability for your work and require appropriate insurance,
- You are not eligible for holiday pay, and
- You will not have any job security.
If you decide to become self-employed consider these additional costs as well as any added costs for tools and supplied that you would normally be responsible for.