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Self Employed

Self Employed Taxes or Employee?

EMPLOYMENT INCOME see CRA information guide (RC4110)

It is important to distinguish between an employee and a self employed individual for tax purposes as the deductions available in computing net income differs significantly for each of the above. So if you are wondering whether self employed taxes or employee taxes apply to you, please read on.

Employed individuals are restricted to section 8 deductions in computing net employment income, while self-employed individuals can look towards section 20 (broader than S8) deductions in arriving at net business income. Other important considerations are the CPP/QPP and EI premium implications to both the employee/self-employed individual and the employer/contactor. There are also GST/QST implications if one is self-employed.

The courts have looked at a number of factors in determining if an individual is an employee (employment income) or self-employed (business income):
Control: Generally, in an employer/employee relationship, the employer controls, directly or indirectly, the way the work is done and the work methods used. The employer assigns specific tasks that define the real framework within which the work is to be done. Is there a master/servant relationship?

Ownership of Tools: In an employer/employee relationship, the employer generally supplies the equipment and tools required by the employee. In addition, the employer covers the following costs related to their use: repairs, insurance, transport, rental, and operations (e.g., fuel). In some trades, however, it is customary for employees to supply their own tools. This is generally the case for garage mechanics, painters, and carpenters. Similarly, employed computer scientists, architects, and surveyors sometimes supply their own software and instruments.

Chance of Profit/Risk of Loss: Generally, in an employer/employee relationship, the employer alone assumes the risk of loss. The employer also generally covers operating costs, which may include office expenses, employee wages and benefits, insurance premiums, and delivery and shipping costs. The employee does not assume any financial risk, and is entitled to his full salary or wages regardless of the financial health of the business.

Ability to subcontract or hire assistants: If the individual must personally perform the services, he is likely to be considered an employee. Alternatively, if he can hire assistants, with the payer having no control over the identity of the assistants, he is likely to be considered self-employed.

Responsibility for Investment and Management: If the individual has no capital investment in the business and no presence in management, he is likely to be considered an employee. Alternatively, if the individual has made an investment and is active in managing the business, he should be considered self-employed.

Other points for consideration: Does the taxpayer have more than 1 client? Does the taxpayer advertise his services? Does the taxpayer bill the client on own letterhead? What are the intentions of the parties?
Must look at all the factors – some may be more important than the others, depending on the case on hand.

For more information, please contact us.

Category: Business Tax Tips, Personal Tax Tips

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