There is a big difference between an employee and a Self-Employed Contractor. Knowing the differences between the two can have a significant impact on your income tax, especially if you think you’re a self-employed contractor and the Canada Revenue Agency doesn’t. If you are thinking of becoming an independent contractor, there are lots of things you should know.
There are lots of benefits and risks to be an independent self-employed contractor.
Self-employed contractors usually charge more per hour than what they would get as an employee in a similar position. You will also gain more freedom and control of when and how you work.
As a self-employed contractor, you can claim business expenses to reduce your taxable income, including:
- At-home expenses
- Vehicle costs
- Tools and equipment
- Even entertainment expenses
Being a self-employed contractor can also make it easier for those you work for. The beautiful thing about this is that, they do not have to deduct taxes, make EI and CPP contributions, or follow employment standards legislation because you are not on their payroll.
All that freedom comes with risks. As a contract employee, there is no job security. If the company that contracted you terminate your appointment, you are going to be left without severance.
Should you become unemployed, you will not be eligible to collect EI. Because you didn’t pay into it.
Because the work is contracted, you do not receive benefits, sick pay, or holiday pay. Unless this was negotiated into a contract. For the most part though, this is why independent contractor rates are higher than employee rates.
Tax Advantages for Self Employed Contractors
Filing your taxes with the Canada Revenue Agency when you’re a salaried employee is pretty basic. It is your employer’s responsibility to deduct income tax from your paycheck and you get a T4 for your taxes.
As a self-employed contractor, it is solely on your shoulders to keep track of how much taxes you owe to the Canada Revenue Agency. In other words it’s imperative that you understand the tax obligations. Ignorance is not an excuse.
As a sole owner or partnership, you have the ability to reduce your taxable income by claiming valid businesses expenses. For instance, if you are into home business, you will be able to deduct a percentage of costs related to the business.
As a self-employed contractor, you should understand that you are required to submit an annual tax return that reports the gross income, gross expenses, and net income. If you earn more than $30,000 a year (or four consecutive quarters or a single quarter) you also need to charge and collect GST/HST.
T5018 Statement of Contract Payments
To navigate Canada’s complex tax legislation can take a lot of time for self-employed workers and independent contractors.
A good example is understanding what needs to get reported on the T5018 information return. If you are an individual, trust, partnership, or corporation and more than 50% of the business’ income comes from construction, and you make payments to subcontractors for construction services, you need to report the amount paid or credited.
To report payments to subcontractors for construction work, including any GST/HST and provincial/territorial sales tax, you must:
- Complete the T5018 slip
- Complete the Statement of Contract Payments, or
- Provide a listing of all payments made to subcontractors, on a line by line basis in column format with all the information required on the slip.
All the summary information needs to be on the listing, including the total payments to each of the subcontractors, the total number of subcontractors who received these payments, and an authorized person’s signature.
This also applies to Canadian resident paying another Canadian resident for construction services performed outside of Canada.
This may sound like too much work to your and you may decide to take the easiest way by paying the contractor “under the table” to avoid paying tax. If caught, you could face criminal prosecution with fines and penalties of up to 200% of the tax you tried to avoid.
FBC, Helping Self-Employed Contractors File Their Tax Returns
Being an independent or self-employed worker can be a great way to earn more money than you ever could as an employee. Though as self-employed contractor, bookkeeping, filing taxes, and any required record-keeping and licensing will be your responsibility.
You can also see how to start your own business in Canada.