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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