Last updated: Feb. 8, 2021
Tax Differences Between an Employee & Self-Employed Contractor
Last updated Feb. 8, 2021.
Are you an employee or a self-employed contractor? Knowing the difference is important in the eyes of the Canada Revenue Agency (CRA).
Employment status directly affects your entitlement to employment insurance (EI) benefits, and has an impact on how you’re treated under Canada Pension Plan (CPP) and Income Tax Act legislation.
In an employer-employee relationship, the payer is considered the employer and the worker an employee. Employers are responsible for deducting Canada Pension Plan (CPP) contributions, EI premiums, and income tax from employee income. Employers must remit these deductions along with their share of CPP contributions and EI premiums, to the Canada Revenue Agency (CRA).
If you’re a self-employed contractor, you must operate a business and be engaged in a business relationship with the payer. You’re responsible for knowing how much money you make, what you can and can’t deduct as a business expense, and how much money you’ll need to remit in taxes.
Independent Contractor vs. Employee
How does the CRA define a self-employed contractor vs. an employee?
The key question they ask is whether “the person is engaged to carry out services as a person in business on their own account, or as an employee.” They want to know what the intent was between the self-employed contractor, and the payer when they entered into the working relationship. Did you intend to enter into a contract of service or did you intend to enter into a contract for services (business relationship)?
We recommend having a written agreement defining your working relationship and setting out the intentions of both parties to offer evidence if the CRA is investigating if you are an employee or self-employed contractor.
The CRA has outlined criteria to determine whether you’re an independent contractor or an employee. The criteria includes:
- 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
We outline the key distinctions that define a contractor below.
Contractors set their own terms
Contractors decide how and when to perform the required work. They work independently and don’t have anyone overseeing their activities. They’re free to work when, and for whom they choose, and may provide their services to different payers at the same time. Ultimately, contractors can accept or refuse work from the payer.
Contractors assume the financial risk
Employees don’t assume any financial risk and their expenses are reimbursed. A contractor doesn’t have a guaranteed stream of income and could incur losses, and they’re financially liable if they don’t fulfill the obligations of the contractor.
Contractors can subcontract work or hire assistants
Contractors can hire a subcontractor to do the work or help do the work, and pay the costs for doing so. The payer has no say in who they hire.
Contractors purchase tools and equipment
Self-employed contractors supply their own tools and equipment required for a job, like a wrench or hammer, or a truck. They are responsible for repair, maintenance and insurance costs. Since they’ve made an investment in these tools, they retain the right over the use of them. Note: Sometimes skilled tradespeople who are employed also have to supply their own tools, like auto mechanics.
If you’re a contractor, you can deduct the cost of certain business expenses against your income, lowering your tax bill. We outline key deductions below.
Tax Deductions for Self-Employed Contractors
- Accounting, bookkeeping and tax preparation fees
- Bad debts
- Business advertising and marketing
- Car and truck expenses
- Meals and entertainment
- Office space
- Supplies, tools and materials, like a power drill, hammer, measuring tape, paint or packing supplies.
- Subcontractor salaries
- Union dues and membership fees
There are also tax credits you can take advantage of.
Tax Credits for Self-Employed Contractors
Apprenticeship job creation tax credit
If you own a small business that has hired an apprentice, you can claim 10% of their wages, up to a maximum of $2,000 per eligible employee. An eligible apprentice is someone who works for you in a qualifying trade in the first two years of their field of expertise. Any unused credit can be carried back three years and carried forward 20 years (to help offset larger tax bills).
Input tax credit
If your small business claims goods and services tax/harmonized sales tax (GST/HST), you may be able to recover GST/HST paid or payable on purchases and expenses related to your business, by claiming input tax credits. If you own a business and buy supplies for it, you can claim the entire amount of GST or HST paid for those items.
Did you buy new machinery or equipment for your business? You may be able to claim the investment tax credit. You can also claim unused investment credits from the previous 20 years on your current year’s taxes.
FBC, Helping Self-Employed Contractors Navigate Tax Season
If you’re 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.