Being an Independant contractor

I did some reading this week to try to determine what it means to be an independent contractor in Ontario. It turns out that the Canadian Revenue Agency (CRA) has a different view than most of the industry and it is unclear exactly what contractors need to do to be considered independent. Why would you care one way or the other?

Well first, lets consider the forms of self employment that are available.

  1. Sole proprietorships are businesses where the individual is the business – there is no legal distinction between the two. You can often operate under your own personal name without having to register a business (when you add something to the name, registration is required) and report your gross income, expenses and resulting net income as business or professional income at tax time.
  2. Partnerships are similar to sole proprietorships, except they have more than one owner, with taxable income and liability being shared amongst owners.
  3. Corporations are separate legal entities from the actual business owner. This form of business offers added legal protection, but in the early years a sole proprietorship or partnership will often offer more tax advantages.

Corporations can be formed by anyone and exist as a separate entity under the law. They get taxed at a much lower rate that most people and continue to exist after their creator die. New officers and share holders can be appointed making the transfer of ownership straight forward. Creating a corporation can cost anywhere from a few hundred to a few thousand dollars and is only really useful if you have more income than you need to live.

Being self employed can have perks but the advantages come wrapped in disadvantages so consider both carefully.

Some of the pros include:

  1. You can charge more per hour than an employee.
  2. You spend more time working and less time doing admin and sales tasks.
  3. Employers tend to treat contractors differently as they seem to cost more. Contractors tend to get resources they need to do their jobs faster than employees in the same organization.
  4. Contractors can claim expenses like at-home business expenses (telephone, internet, and other utilities), business use of vehicle costs, meals, purchase of equipment, and even entertainment, in accordance with the Canada Revenue Agency’s (CRA) guidelines.
  5. Contractors can choose when and where they want to work.

There are always the cons to consider however:

  1. Job security is completely in your hands as a contractor. Work can be sparse from time to time so you have to plan for these occasions.
  2. Employment Insurance is not available to Contractors.
  3. Many employee benefits like drug plans and insurance are not available to contractors.
  4. Independent contractors have very thin legal safeguards compared with traditional employees when it comes to issues of liability. As an independent contractor, you can be held personally liable for mistakes or accidents that occur while working. If something goes wrong, you may find yourself the target of a lawsuit, rather than the company you hold the contract with. It is possible to get insurance to protect against this, but it can be costly. If you find yourself in a position where you may be liable, incorporate.

Being self-employment can have significant tax advantages. As a sole proprietorship or partnership you can reduce your taxable income using valid business expenses. (Corporations use expenses to reduce the net profit of the company, with the business owner either drawing a salary or taking dividends.) That said it is extra work that you will have to pay for or find time to do your self.

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