The question of whether a person is in a business relationship (self-employed contractor) or in an employee-employer relationship sometimes isn’t a simple one. Often the line becomes blurred, and what was once one type of relationship morphs into the other. So, are you an employee or a self-employed contractor?
Why is this differentiation important? Your employment status directly impacts your entitlement to employment insurance benefits under the Employment Insurance Act. It can also have an impact on how you are treated under other legislation such as the Canada Pension Plan and the Income Tax Act. Employees also have very different tax responsibilities than self-employed contractors. Additionally, there are several tax benefits available to self-employed contractors that employees just don’t have access to. Recognizing which category you fall into is crucial.
What factors impact your status? Here are just a few:
- What was the intent when entering into the relationship? For example, did you sign a contract of service (employer-employee relationship) or did you enter into a contract for services (business relationship)?
- What level of control do you have over your own activities? A self-employed subcontractor generally has more control than an employee.
- Tools and Equipment. Are the tools required for your job provided by yourself or the person paying you?
- What is the level of risk involved? For example, an employee will face a much lower risk of loss compared to a self-employed contractor.
- Are your responsibilities integral to the your employer’s business?
Want more clarification? The Canada Revenue Agency goes into great detail here: http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-e.html#employee_selfemployed.
When it comes to taxes in general, there are benefits and disadvantages for each group. For example, most employers are required to complete employee tax requirements (as far as deduction and submission) on the employee’s behalf, providing the employee with a T4 every tax season. In contrast, a self-employed contractor will need to do this on their own, gathering and submitting GST and HST and payroll deductions as required. However, an employee is required to pay EI benefits, whereas a subcontractor is not (they can choose to do so). Furthermore, while employees may be able to claim a few expenses depending on the nature of their job, far more expenses are tax-deductible for the self-employed contractor.
If you’re concerned about how your status may impact your tax responsibilities, or if you feel as though you may have incorrectly claimed items as a result of misinterpreting that status, give Tax Solutions Canada a call today. We can help you sort things out: 1-888-868-1400.