Is it better to be an employee or self-employed?

What factors determine employment status?

The Canada Revenue Agency (CRA) uses an important distinction when evaluating a relationship between a worker and a business: the difference is between a contract for “services” and a “contract of service.”

What is a contract for services?

A contract for services is a business relationship, like when you hire a contractor to renovate your bathroom or a snow removal company to clear your driveway. Neither the general contractor nor the snowplow driver is your employee. They do not work for you. They provide work for you.

What is a contract of services?

If you own a restaurant and hire a cook, or you own a store and hire a cashier, this is a contract of service. You set the shifts and the terms of employment, so it’s a different type of relationship.

How to determine if you are employed or self employed

When in doubt about your employment status, the CRA considers six primary factors, Elza.

1. Control: When the payer dictates when and how work is done, it’s more likely that the person being paid is an employee.
2. Tools and equipment: An employer is more likely to provide equipment and tools to an employee compared to a self-employed contractor who provides their own.
3. Subcontracting work or hiring assistants: An employee is unlikely to be permitted to subcontract their work or hire others, whereas a self-employed person can make decisions like this without permission.
4. Financial risk: Employees typically do not have to pay for expenses to earn their income—or they are reimbursed when they do—whereas a self-employed person is responsible for their own expenses and business profitability.
5. Responsibility for investment and management: A worker generally does not have to invest their own capital to earn their living, and they don’t typically have a discernible business presence.
6. Opportunity for profit: An employee’s income may vary depending on their hours, bonus or commissions, but a worker cannot generally control their proceeds and expenses nor incur a loss, like a self-employed person.

It’s also more likely that you’re an employee if you’re only providing services to a single payer. Someone who is self-employed tends to have multiple clients or customers.

Should you incorporate if you’re self-employed?

If you’re self-employed and run a business that has a significant amount of risk, Elza, you may want to consider incorporating. This can limit your liability.

If you have business partners, incorporation can also be a more efficient way to involve shareholders or raise capital.

One of the main tax advantages of incorporating is the ability to retain savings within the corporation. You may benefit from a corporate small business tax rate that’s around 40% lower than the top personal tax rate.

However, Elza, it generally makes sense for incorporated business owners to maximize their contributions to registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs) and other tax-preferred personal accounts. So, saving a small amount in your corporation, such as $5,000 per year, may not be sufficient justification for incorporation—unless there’s a non-tax reason to incorporate in the first place.

It’s a misconception that corporations can claim more tax deductions than sole proprietors. The tax deductibility of business expenses is similar in both instances.  

However, a self-employed worker can claim more expenses than an employee. So, if you’re an employee who files as a self-employed worker, you run the risk that the CRA will disagree with your claim and deny expenses you deducted.

Self-employed vs. employee

Whether you’re self-employed or not impacts not only your eligible tax deductions, Elza. It also influences how your income tax is remitted to the CRA, your Canada Pension Plan (CPP) contributions, your eligibility for Employment Insurance (EI), and possibly your entitlement to a severance or termination pay.

There may be cases that can be tilted more towards employment or self-employment, Elza, by changing the work conditions to favour one over the other. But the distinction between the two is usually pretty clear. So, you cannot just pick which you prefer. The fact pattern is what dictates whether you are an employee or self-employed.

If you’re really in doubt, a payer or a worker can request a ruling from the CRA.

Read more about careers:

• Common questions from newcomers about working in Canada
• Micro-credentials in Canada: Is it worth it to upskill?
• Do I need a GST or HST number?
• How to become a contractor: The real costs

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

Linkedin Twitter Facebook Website