How to Become an Independent Contractor and Not an Employee?
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Your tax status marks a strong impact on your Canadian Income Tax. The motivation for you to be an independent contractor and not an employee is that the independent contractors have far more write-offs and pay a far lower tax rate than employees. This allows them to retain more after-tax cash in their hands. The CRA uses specific criteria to determine your tax status as an employee or independent contractor. You can take steps to protect your status as an independent contractor if you understand them and how to implement them. So, how can you do it? Well! it all depends upon the contract between you and your customer or quote-unquote employer. The agreement must include specific clauses, so it passes the CRA’s test of independent contractor versus an employee.
- Control – The first essential factor is control. The key question here is: who is in charge? You are an employee if you work for someone else’s business and are subject to their control. If it appears that your customer or employer is exercising a great deal of control over, you then it’s not going to work out. You are going to be deemed an employee. So, consider properly defining the control factor in the agreement, which clearly states the company’s understanding that you will work independently with minimal or no supervision.
- Provision of tools and equipment – Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Make sure it says in the agreement therefore that you are an independent contractor, responsible for supplying your own tools and equipment for example laptop and printer.
- Financial risk – The question of whether someone is an employee or independent contractor is also tied to the chance of profit or risk of loss. In most cases, employees don’t take any financial risk associated with their job. However, an independent contractor has financial risk and can incur losses because he pays fixed monthly costs even when work is not currently being done. In this case, the worker is financially liable if the obligations of the contract are not fulfilled. So, in the agreement between you and your customer or employer, it’s essential to stipulate that you are responsible for paying costs. Costs could include rent as well as the share of the overhead expenses. The rent does not have to be huge, but it should be a reasonable amount.
- Opportunity for profit – Employees don’t have the same opportunity for profit as do independent contractors. They have opportunities for profit because they can pursue and accept contracts as they see fit. They can also negotiate prices for their services and increase their proceeds or decrease their expenses to maximize their profit. So, it’s important to put in the employment agreement that you have the opportunity for profit such as a milestone payment or a success payment for work completed.
- The intention of both parties – Last but not the least factor that you should consider putting into your contract with your customer is that it is the intention of both parties for you to be treated as an independent contractor who is self-employed and for the payer to be treated like a customer, not an employer. This is not an employer-employee relationship. A lot of court cases have been decided on this very factor alone in treating an individual as an independent contractor as opposed to an employee.
Conclusion
Thus, it is important that independent contractors take care to ensure that their status is clearly defined as such. Of course, you should always consult with your accountant or contact the CRA if you are unsure about your classification. So, if you want to save yourself a ton of money, feel free to reach out to Filing Taxes at 416-479-8532. Schedule your tax preparation appointment with us and take the first step towards proper management of your finances. Our professional personal tax accountants will make sure to get you the maximum tax refund on your personal tax return.
QUESTIONS
Is it better to be an employee or an independent contractor?
Independent contractors enjoy a considerable tax advantage when it comes to the potential for tax deductions that aren’t available to employees. All reasonable business expenses are generally allowed for a tax deduction. Companies prefer to take on board independent contractors to avoid stringent and expensive commitments that come under employment law. Businesses don't have to provide independent contractors with health insurance, life insurance, and other common employee benefits—all of which increase their costs.
How do I set myself up as an independent contractor?
The foremost factor is to set your business up the right way from the beginning. This will save you from hassle down the line. Understand and balance the benefits of being an independent contractor with the downsides. Write a business plan and set up your business accordingly. You must have your own standard contract, NDA (non-disclosure agreement), and services agreement for your clients to sign.
Can I be an independent contractor without a contract?
Companies prefer to hire an independent contractor for most types of projects, there is no legal binding law put anything in writing. But, failing to have any written agreement as an independent contractor is a recipe for disaster. The statute requires some kind of oral or written settlement to determine the tax status. A lot of court cases have been decided on this very factor alone in treating an individual as an independent contractor as opposed to an employee.
What qualifies you as an independent contractor?
If you are an individual in business who works through a contract of service for its payers, meaning the payer cannot exercise any control over your work, you are classified as an independent contractor. As an independent contractor, you are contracted to perform a service for another business as a non-employee. You are responsible to keep track of their earnings and include every payment received from clients.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.
