Employee vs. Self-Employed (Contractor)
Assessing the nature of a business relationship to determine whether an individual is an employee or a self-employed contractor is significant for tax purposes. A self-employed contractor is able to deduct many more business expenses and incorporate their services to take advantage of lower tax rates.
The courts have collectively looked at several factors to determine whether an individual is an employee or a self-employed contractor. These factors include:
The individual would lack control if they are directed by someone who has the authority to control what and how the work is to be done. A lack of control by the individual would signify an employer-employee relationship.
Ownership of tools
An individual who does not provide the tools and equipment needed to complete the work would likely be viewed as an employee. A self-employed contractor would generally be self-reliant and thus provide their own tools to complete their work.
Chance of financial risk and profit
If an individual does not provide any form of funding, bears no financial risk in the course of providing their services, and does not share the opportunity to maximize profits, this would imply an employment arrangement. A service provided by a self-employed contractor, as with any business venture, would inherently include some form of financial risk and opportunity for profit.
Specific projects and time-frame
An individual that provides their services without reference to a specified task or project and without reference to a specified time-frame would again imply that they are an employee. Generally, a self-employed contractor would provide more specific services for a more specific time-frame.
An employee’s work will generally be an integral component of the business and could include a variety of key services on an on-going basis. Generally, a self-employed contractor’s work would not be integral to the business but would instead represent a value added service.
If you are uncertain as to which category you fall into you should seek professional advice as there are important steps to undertake before you sign a contract. As Chartered Accountants in Toronto and Mississauga we can help you establish self-employed contractor status through proper planning. Contact a Chartered Accountant by email at firstname.lastname@example.org or call us at 647-725-2537 to discuss what option is best for you and for additional tax tips.