Tax Differences Between an Employee & Self-Employed Contractor
The work force is always changing, and being a self-employed contractor is more common than ever before.
Whether you’re considered a self-employed contractor or an employee of a business makes a difference to the Canada Revenue Agency (CRA).
Understanding the tax filing differences between being an employee and self-employed contractor will have huge implications when it comes time to file your taxes with the Canada Revenue Agency.
When you are an employee, your employer automatically deducts income tax from your weekly or bi-weekly pay. There’s really nothing for you to think about.
Then, at the beginning of each year you receive a T4 slip, which shows you how much you earned and how much you paid in taxes.
As an employee, filing your taxes is easy and any off-the shelf software will walk you through it.
If you’re a self-employed contractor, it’s entirely different.
You’re responsible for knowing how much money you make, what you can and can't deduct, and knowing how much money you need to remit in taxes.
Failing to understand Canada’s contractor tax law is not an excuse when it comes to preparing and filing your taxes.
Independent Contractor vs. Employee
The CRA has a four-point test to determine whether you're an independent contractor or an employee. The criteria include:
- How much control the worker has
- Who provides the tools used in the job
- How much profit/loss risk is involved
- Whether the worker can subcontract work or hire additional help.
Despite this definition, there is still growing concern among self-employed contractors and small business owners about the issue of Personal Service Business Risk.
The CRA identifies corporations as Personal Service Business (PSB) if they provide a service to an organization that an employee would normally perform. This could entail working onsite or using tools or equipment provided by the organization.
If your working relationship could be seen as an employee-employer situation, your corporation might be considered a PSB. If so, you are viewed by the CRA as being an “incorporated employee” rather than a self-employed consultant.
A PSB has implications for both the employer and the contractor when it comes to salary, deductions and remittances. Not knowing can be costly for both.
Benefits of Being a Self-Employed Contractor
There are of course a lot of benefits to being a self-employed contractor for both you and those who employ your services.
If the CRA does not think you are self-employed, it means fewer deductions.
If the CRA does determine you are a self-employed contractor there are a large number of business deductions you can take advantage of to help reduce how much you pay to the CRA.
- Income Splitting
If your partner, children, or other family members have worked for your business, you can pay them a salary or wages.
Doing so helps reduce the amount of money you claim for taxes, and chances are your children or partner will pay a lower tax rate on their income.
- Home Office Expenses
If your home office is where you conduct the majority of your business, or is used on a regular and continuous basis, you can deduct a portion of different costs.
This includes mortgage, property taxes, home insurance, repairs and maintenance, utilities, landscaping etc.
If the home office costs exceed the business income, the excess can be carried forward to future years.
- Deduct Other Expenses
There are a lot of other expenses self-employed contractors can deduct. There may be some restrictions on certain expenses, but the opportunity to deduct expenses and maximize your income is quite long.
You can deduct expenses related to advertising, promotions, meals, entertainment, memberships, subscriptions, office supplies, telephone, and vehicle expenses.
Professional tax experts can provide you with a complete list.
FBC, Helping Self-Employed Contractors with Their Tax Returns
There are a lot of business tax filing differences between self-employed contractors and employees. While it might sound easy to determine which category you fall into it, it can get confusing.
It’s a distinction worth understanding; knowing where you fit in could end up saving you tens of thousands of dollars annually in taxes.
If you’re not sure if you’re a self-employed contractor, are looking for valuable tax tips, and accurate tax advice, talk to the tax experts at FBC.
Since 1952, the tax professionals at FBC have worked exclusively with small business owners, self-employed contractors, and those in the agricultural sector.
Over the last 65 years FBC has provided customized tax services to clients across the country, no matter how straightforward or complex. This includes tax preparation, business planning, bookkeeping, and financial planning.
For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.