Friday, 30 June 2017

Whether you are Employed or Independent Contractor (Self-Employed)?
Many a times the question arises whether you are employed or self-employed. The reason behind this distinction is because of the difference in its tax treatment. Employed person have limited scope and ability to claim the expenses against employment income. Self-employed has a wider scope in claiming the expenses deduction.
Difference in the tax treatment between employed and self-employed:
Payroll Tax Deduction:
If you are employed, deduction of Canada Pension plan (CPP) and Employment Insurance (EI) premium are made and there are no such deductions for the self-employed.
Payroll deductions are made with reference to the gross income for salaried tax payers and self-employed pay CPP only on the net income from business (i.e. Gross Revenue-expenses).Also, Self –employed pay double the CPP deduction i.e. employee and employer part.
EI Deduction:
Salaried employees have the advantage of claiming EI benefit when they are willing and able to do the job but cannot find the same due to being laid off from their current jobs.
Self-employed do not enjoy this advantage.
How to determine whether you are employed or self-employed:
Canada Revenue Agency has outlined following factors to in their publication (RC 4110- “Employee or Self-Employed?) in determining the above distinction.
Tools and Equipment:
Normally, an employee is supplied by his employer the tools of the trade required to perform the necessary job function. In case of self-employed contractors tools and equipment are brought by themselves to discharge their function/tasks.
Control and Direction:
If you are an employee, you have a control and direction from your employer with regard to the manner and the time limit within which the task needs to be performed.
Self-employed contractors determine, by and large their own methodology and completing the assigned task. A deadline or the time limit is specified upon the contractors with little control on the manner in which the task needs to be performed. Besides this, self-employed can appoint their own employee without the employer’s permission. In case of employment, employee needs to obtain prior permission before appointing anyone.
Chance of Profit or Risk of Loss:
If you are self-employed you are your own boss and solely responsible for any loss and likewise share the profit that you make out of your own activity. Employee although many a times will share profit of the employer to a limited extent are never called upon to share the loss made by the employer.
There are some other factors such as Integration of your activity with that of the employer’s etc.in deciding the above distinction.
In case where there a very thin line of difference, following factors must be looked into in deciding whether you are an employee or self-employed.
Ø  Whether you work the sets numbers of hours per day
Ø  Manner in which you can finish the given task or assignment
Ø  Whether you are a member of the group life, drug and dental plan of the employer
Ø  Whether you carry your own insurance in completing the assigned task
Ø  Whether you are paid without submitting the time sheet and whether you are having an outstanding receivables
Ø  Whether you bring in your own tools and equipment to finish the work
Ø  Manner of direction and control provided by the employer

Disclaimer: Any discussion on this blog relating to tax matters is purely for educational purposes and not taking any specific actions based the general tax rules described therein. Your tax situation could be different and as a result there may be different tax strategies applicable in your case. We do not claim the tax situations described above to be exhaustive or conclusive. In case of any specific tax situations or problems, you are advised to seek professional advice.


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