Sometimes, determining whether you are an employee or self-employed is a tougher question to answer than you might imagine. The relationship between you and your employer determines your employment status, which in return determines whose responsibility to deduct taxes, EI, and CPP from your income.
When you are an employee, your employer is responsible for payroll deductions, but when you are self-employed, you must remit your own deductions on your own behalf.
Are You an Employee or Self-Employed?
Factors to Consider
The CRA uses six different factors to determine whether you are considered an employee or self-employed:
- Control: Control is the ability, authority or right you possess with respect to how work is performed and what work is performed.
- Tools and Equipment: Determine whether you own and provide your own tools and equipment to finish your work. The CRA also considers whether you are contractually responsible for paying for the rental or lease of tools and equipment.
- Subcontracting Work or Hiring Assistants: Examine whether you have the ability to subcontract work or employ workers. It can have a bearing on your opportunity for profit or loss, as hiring an assistant costs money from your bottom line.
- Financial Risk: Examine how much financial risk you have, and consider whether you have any fixed ongoing expense or costs not reimbursed by your employer. If you are an employee, you should not have any financial risk, as your employer should reimburse you for expenses and you should not have any ongoing expenses. If you are self-employed, you have greater financial risk; you are still responsible for paying ongoing expenses, even when the work is not being performed.
- Responsibility for Investment and Management: Determine whether you must make a financial investment to render services delivered by the business.
- Opportunity for Profit: Examine the financial stake you have in your business and your opportunity to make a profit or a loss. Consider your degree of risk.
You are considered an employee if you entered a contract of service with your employer. The employer defines your role and how to perform your job. Usually, you and your employer sign a written agreement to specify your job requirement, benefits, deductions, etc. The employer controls your work environment (i.e. office or home), salary, schedules, training required, and vacation time. The employer can also decide on the final submission of your work and whether or not they accept your suggestions.
If you are an employee, your employer is responsible for payroll deductions including CPP contributions, Employment Insurance premiums, and federal tax. Your employer must remit these amounts to the CRA on your behalf. If your employer does not make the proper deductions for CPP and EI, they are responsible for paying both your share and their own share in addition to interest and penalties.
Some employers allow you to buy your own tools or work from home. In this case, they are required to provide you with the T2200-Declaration of Condition of Employment form. The T2200 will include all expenses you incurred to carry out your work duty such as vehicle expenses, home office expenses, and more. If your employer reimburses you for any of these expenses, you should deduct the amount from your total employment expenses. This form has to be approved and signed by your employer. You don’t file the form with your income tax return, you save it in case CRA needs it for reference. You report your employment expenses using form T777 and file it with your tax return.
Self-employed individuals exercise control over their work. You perform your job in the way you see fit. You control how the job is performed, schedules, and your fees. After you reach an agreement with your employer, you can accept or refuse additional work. You buy your own equipment and tools, and you are responsible for any other expenses you incur.
If you are self-employed, you are responsible for paying CPP contributions to CRA. You also have to calculate your net income by subtracting your expenses from your gross income. You will be responsible to emit GST/HST on your income and pay the taxes. EI premiums on self-employment are optional. Once you elect to contribute to EI, you will not be able to stop. You must pay the employee portion as well as the employer portion for CPP and EI.
You will need to complete the T2125-Statement of Business or Professional Activities and file it with your tax return. The form itemizes the income from your business, expenses, any, and GST/HST collected. If you have multiple business activities, you will need to file a separate T2125 form for each.
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