People who are self-employed can generally take advantage of a wider range of available deductions than employees. One of the benefits of being considered an independent contractor is that you are not required to have payroll taxes withheld from your income. You are also not required or permitted to pay Employment Insurance (EI) premiums if you carry on business for yourself. This could save you up to $711 in EI premiums in 2008 when taking into account both the employee and employer's portions. However, this means that if your consulting contracts terminate and you are left without work, you cannot benefit from EI.
Canada Pension Plan (CPP) contributions, on the other hand, are still required. As well, if you are self-employed, you will need to pay the "employer's share" as well as your own share. The total could be as high as $4,098 for 2008. You will, however, be able to claim a deduction for the “employer's share” of CPP up to the maximum of $2,049 for 2008, and a tax credit for your own share of the CPP.
The distinction between an employee and an independent contractor is not always clear. You will more likely be considered an independent contractor carrying on your own business as a proprietor if you:
Each case will depend on its facts. Keep in mind that there are other pros and cons of being employed versus self-employed. Consult the advice of a Chartered Accountant.
Information for Tax Tips is provided as a public service by the Chartered Accountants of British Columbia.