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 the relationship between an employee and a business: the distinction is between a contract for “services” and a “service contract.”

What is a contract for services?

A service contract is a business relationship, such as when you hire a contractor to fix your bathroom or a snow removal company to clear your driveway. Your employee is not a general contractor or snowplow driver. They don't work for you. They offer work for you.

What is a contract for services?

If you own a restaurant and hire a chef, or own a store and hire a cashier, this is a service contract. You set the shifts and goals of work, so it's a different kind of relationship.

How to determine if you are employed or self-employed

When in doubt about your employment status, the CRA looks at six key factors, Elza.

1. Manage: If the payer dictates when and how the work is done, it is more likely that the payee is an employee.
2. Tools and equipment: An employer is more likely to provide an employee with tools and equipment compared to a self-employed contractor who provides his own.
3. The task of hiring or hiring assistants: An employee would probably not be allowed to enter into a contract of employment or hire others, while a self-employed person could make such decisions without permission.
4. Financial risk: Employees generally do not have to pay expenses to earn their wages—or they are reimbursed when they do—while the self-employed person is responsible for his expenses and the business's profits.
5. Investment and management responsibility: The worker usually does not have to invest his own money to support himself, and he usually has no visible business presence.
6. Profit opportunity: An employee's income may vary based on hours, bonus or commissions, but an employee generally cannot control their own profits and expenses or incur losses, as a self-employed person.

You may also be an employee if you provide services to only one payer. A self-employed person often has many clients or customers.

Do you have to file if you are self-employed?

If you are self-employed and run a business with a high amount of risk, Elza, you may want to consider incorporating. This can limit your credit.

If you have business partners, incorporation can be a more effective way to engage shareholders or raise capital.

One of the biggest tax benefits of incorporating the power of savings is within the organization. You may benefit from a small business tax rate of around 40% below the top personal tax rate.