A contractor has no guaranteed income stream, has non-reimbursable expenses and fixed costs that must be covered even if no work is done. Entrepreneurs can suffer losses and will be financially liable if they fail to meet their obligations. If you are an entrepreneur, you can deduct the cost of certain business expenses from your income, reducing your tax bill. We describe the main deductions below [read more on our blog “Small Business Tax Deductions”] To determine the relationship between an employee and contractors, the CRA will examine who is in a position of control in the relationship to determine where, when and how the work is done. Even if the employee chooses his own schedule and the way he carries out his work, the rating agency will also check who has the right to control the work. Sometimes an employer can simply sit on the sidelines and let an employee determine how they should do their job, but that doesn`t mean the employee has control. Always anchor your relationship with each employer in a contract and focus on the first three points of this four-point test. It is not always easy to answer the question of whether a person is in a business relationship (independent contractor) or in an employee-employer relationship. There have been many court cases on this subject. Courts generally consider the following criteria in their decisions: the credit rating agency uses specific criteria to determine which one is which, and you can take steps to protect your status as an independent contractor if you understand it and how to implement it. Employees receive salaries and/or commissions.
But if a worker has a chance to make a profit or suffer a loss, it is much more likely to be an indication of a contractor. For example, an online marketing consultant may have negotiated the price of the contract, rented an office, spent money on office equipment, business cards, and website to give that person a more professional image and attract one of their biggest customers. The fact that this person has spent money to win this customer shows that there is a chance that they will suffer a loss if the contract does not work. On the other hand, if the contract works, there is a chance that a profit can be made (i.e. the revenue generated exceeds the expenses incurred). Your employment status affects your eligibility for Employment Insurance and your rights and obligations under other legislation such as the Income Tax Act and the Canada Pension Plan. So it`s worth knowing if you`re an employee or an independent contractor. If you work for an employer, you are an employee.
If you are self-employed, you are an independent contractor. However, things are rarely that simple. To find out which category you belong to, you can use the general guidelines developed by Canadian government agencies and courts. While this may well have helped employers clarify the relationship between employer and entrepreneur in the past, employers are increasingly concerned that the four points do not sufficiently take into account the changing nature of the work environment, particularly with respect to “tool ownership” and “integration” components in relation to technology and the Internet. Real employees are more likely to work from home as the business landscape evolves, and as a result, “onboarding” is no longer a determining factor. Employees do not assume any financial risk in the operation of the company. They are not required to make capital investments and their expenses are reimbursed. In general, the employment relationship between the employee and the employer is continuous with a level of security assumed for the employee. When we look at whether a person is an employee or self-employed in the province of Quebec, we look at the relationship between the employee and the payer in a three-step approach.
However, sometimes employees have to provide their own tools. The courts have recognized that, because an employee is obliged to provide tools of the trade, this does not in itself mean that the employee is self-employed. For example, many tradespeople such as auto mechanics have to provide their own tools, even if they are full-time employees. Strawson points out that the problem is not entirely clear. There appears to be a trend towards a more flexible interpretation of the business relationship between a contractor and an employer, but the final decision as to whether a person is an independent contractor or an employee will always depend on the facts and individual circumstances of the individual case. David Sherman, tax lawyer and consultant, says: “Control is one of the most important factors. In practice, I have found that a very strong indicator of whether the relationship is a hire or an independent contractor is whether the person providing the services can hire a subcontractor to do some of the work. Employers usually prohibit this, while someone who hires an independent contractor usually agrees that someone else can do some of the work. “Your financial participation also determines whether you are involved in an employer-employee relationship or a business relationship. Independent contractors provide their own tools and equipment needed for a job, such as computer equipment or tools such as hammers or a truck. You are responsible for repair, maintenance and insurance costs.
Since they have made an investment, they retain ownership of their tools and equipment. An employee`s work is an integral part of their employer`s business. Conversely, tasks performed by a self-employed person are less likely to be integrated into the payer`s business. All employees of a company, with the exception of those who have contributed to the realization of business profits and/or losses, are generally unable to make a business profit (or loss) and generally do not participate in profits or suffer losses incurred by their employer. How does the rating agency define an independent contractor vis-à-vis an employee? To help you understand the process, we explain each factor below and show some indicators that the employee may be an employee or self-employed. On the other hand, a contractor in a business relationship decides how the work will be done, so it is important that you retain the right to decide where, when and how the work will be done if you want to be considered an independent contractor. A business that uses an independent contractor does not have to make a paycheck, which includes income tax withholding and Employment Insurance (EI) payment. The biggest tax benefit for an independent contractor is the possibility of tax deductions that are not available to employees. As a general rule, a self-employed person can deduct all reasonable operating expenses.
Below we describe the main distinctions that define an entrepreneur. The payment method can help decide whether the employee has the opportunity to make a profit or suffer a loss. In an employer-employee relationship, the employee is usually guaranteed a return for the work performed and is usually paid on an hourly, daily, weekly or similar basis. The CRA also has information on the following classes of workers to determine if they are employees or self-employed for Canada Pension Plan (CPP) and Employment Insurance (EI) purposes, explained on its CPP/EI website: Many contractors would prefer to treat their employees as independent contractors or consultants, as this is usually a little easier to manage and no payroll tax has to be paid. The worker would also prefer this type of relationship. However, you must examine the nature of the employment relationship to determine an employee`s status. It is important to decide whether an employee is an employee or self-employed. Employment status has a direct impact on a person`s entitlement to Employment Insurance (EI) benefits under the Employment Insurance Act.
It can also affect how an employee is treated under other legislation such as the Canada Pension Plan and the Income Tax Act. . . .
