Last updated November 23, 2020.
Are you an employee or self-employed contractor?
There’s a big difference, and understanding the differences between the two can have a significant impact on your income tax.
If you’re working as a self-employed, independent contractor or thinking of becoming one, here are some things you should know.
Self-Employed Contractors in Canada
Self-employed contractors set their own terms and decide how and when to perform the required work. You don't have anyone overseeing your activities and you're free to work when, and for whom you choose, and may provide your services to different payers at the same time.
Being a self-employed contractor can also make it easier for those you work for. Because you're not on their payroll, they don't have to deduct taxes, make EI and CPP contributions, or follow employment standards legislation.
All that freedom comes with risks. When you're a contract employee, there is little to no job security. You have no guarantee of steady income and may either make a profit or incur a loss. If you lose a job or are terminated by the company that contracted you, you are going to be left without severance.
Should you become unemployed, you won't be able to collect EI because you didn't pay into it.
Because the work is contracted, you do not receive benefits, sick pay, or holiday pay. Unless this was negotiated into a contract. For the most part though, this is why independent contractors charge a higher rate than employees are paid.
Tax Advantages for Self-Employed Contractors
Filing your taxes with the Canada Revenue Agency when you’re a salaried employee is pretty basic. The employer deducts income tax from your paycheck and you get a T4 for your taxes.
As a self-employed contractor, it’s up to you keep track of how much you owe in taxes to the Canada Revenue Agency.
Luckily, you can claim business expenses to reduce your taxable income, including:
- Accounting, bookkeeping and tax preparation fees
- At-home expenses
- Bad debts
- Business advertising
- Meals and entertainment
- Vehicle expenses
- Supplies and tools
- Union dues and membership fees
If you operate a home business, you can deduct a percentage of costs related to the business.
According to the Canada Revenue Agency, if your home office takes up 10% of the total floor space, you can deduct 10% of home maintenance costs, including home insurance, utilities and cleaning materials. You can also claim depreciation expenses on fixed assets.
You can claim this expense as a tax deduction if the work space in your home is the principal place of business, or you use the space only to earn business income and meet regularly with customers in the work space.
As a self-employed contractor, it’s important to understand that you need to submit an annual tax return that reports the gross income, gross expenses, and net income. If you earn more than $30,000 a year (or four consecutive quarters or a single quarter) you also need to charge and collect GST/HST.
It’s also important to keep accurate, up-to-date records. Hang on to those records for at least six years after your last Notice of Assessment, which is as far back as the CRA will ask to see them in the event of an audit.
T5018 Statement of Contract Payments
It can take a lot of time for self-employed workers and independent contractors to navigate Canada’s complex tax legislation.
It also takes time for businesses to understand the tax essentials of self-employed contractors.
A good example is understanding what needs to get reported on the T5018 information return. If you're an individual, partnership, trust, or corporation and more than 50% of the business’ income comes from construction, and you make payments to subcontractors for construction services, you need to report amount paid or credited.
To report payments to subcontractors for construction work, including any GST/HST and provincial/territorial sales tax, you must:
- Complete the T5018 slip
- Complete the Statement of Contract Payments, or
- Provide a listing of all payments made to subcontractors, on a line by line basis in column format with all the information required on the slip.
The listing needs to have all the summary information, including the total payments to each of the subcontractors, the total number of subcontractors who received these payments, and the signature of an authorized person.
This applies even if you are a Canadian resident paying another Canadian resident for construction services performed outside of Canada.
If all of that sounds like too much work and you’re thinking it might make more sense to just pay the contractor “under the table” to avoid paying tax, think again. If caught, you could face criminal prosecution with fines and penalties.
Learn how to choose the right accounting solution for your business
When we speak to self-employed contractors like you, they tell us that doing the actual work is the easy part of running a business. It’s keeping up with all their tax obligations—record keeping, figuring out which tax deductions apply to them, tax filing, licensing—that’s the hard part.
Most contractors don’t have the time or technical knowledge to handle all the admin on their own. They’re also afraid of making a mistake—they don’t want the CRA to come calling.
Sound familiar? You have enough on your plate just keeping up with the day-to-day of your business. That's why you hired an accounting and tax provider. Or are thinking of hiring one. But how do you find the right fit?
Find the answer in our free e-book: 5 essential questions to ask when choosing when choosing a tax provider.
FBC, Helping Self-Employed Contractors File Their Tax Returns
To ensure you’re up-to-date on Canada’s ever-changing tax laws, are taking advantage of all the tax deductions available to you, and getting accurate tax advice, contact the tax professionals at FBC.
Since 1952, FBC has been working exclusively with self-employed contractors and small business owners. For almost 70 years, we've helped tens of thousands of clients from across the country with their unique tax preparation, business planning, bookkeeping and financial planning needs.
Interested in learning more? Please call us at 1-800-265-1002 or email [email protected] We're also offering a free consultation to explain how you can make sure you’re taking advantage of all the tax-saving opportunities available to you.