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Are You an Employee or an Independent Contractor for Tax Purposes?

The difference between the two is not as easy and clear-cut to determine as it once was.

Your work status has an impact on your eligibility for employment insurance as well as your rights and obligations under other statutes including the Income Tax Act and the Canada Pension Plan. As a result, knowing whether you’re an employee or an independent contractor is crucial.

It should be easy to do this. You are an employee if you work for a company. You are an independent contractor if you are self-employed. Things, however, are rarely so straightforward these days, and as tax season here in Ontario is now in full swing if you are not sure about your current status, now, before you file your personal taxes, is the time to find out.

Understanding Nature of Working Relationship Rules

The nature of your working relationship determines your employment status. You have an standard employer-employee relationship if you have a contract of service, which means the payer decides what kind of work you do and how it should be done. You’re an independent contractor for the payer if there’s a contract for service, which means the payer can solely control the outcome of the task.

Control, ownership of tools and equipment, and opportunity for profit or risk of loss are some of the elements used to determine if a working connection is a contract of service or a contract for service. Confused? Don’t worry, lots of people are.

What Does Level of Control Mean?

Control is often the easiest way to define an employer-employee relationship if things are not crystal clear. Where some people have become confused is when they have multiple jobs in a work from home setting.

In general, whether you work in an office or from home or another outside the workplace location, you’re an employee if the payer dictates how and where the work should be done. Your employer sets your work hours and pay rate, as well as withholds and submits your taxes. Under the Canada Pension Plan, they may provide you with benefits such as vacation pay and a pension.

When you work as an independent contractor, you have a lot of say over how and where the work is done. You usually set your own work hours and pay rate, but you are usually not eligible for company benefits. You’re also in charge of filing your own taxes and reporting your earnings.

Who Owns the Tools and Equipment Used?

If your company supplies you with the tools and equipment you need to execute your job, you are an employee. Your employer is responsible for repairing, maintaining, and insuring those tools and equipment as it sees fit.

If you operate as an independent contractor, you have control over the tools and equipment you use. You have the right to use them, but you are responsible for repairing, maintaining, and insuring them. You’ll also need to set up your own workspace and cover the costs of keeping it up to date.

Even though they are categorized as employees, certain employees, such as carpenters and mechanics, utilize their own tools. Many employees may also be using their own computer, office space, paper and softwares while working out of the office due to pandemic restrictions. This muddies the waters a little, as they are still almost certainly classed as employees, especially if they receive employment related benefits.

People in the latter situation should consider consulting with a tax accountant this year, even if they have not before. Although they are likely to find their classification for tax purposes is still that of an employee, if their employer is not reimbursing them for the use and maintenance of the tools they work with, then they may be able to claim some relief in the form of tax deductions.

Do You Have The Opportunity for Profit or Loss?

Your job status is also determined by who is responsible for the company’s profit or loss. You are not accountable for the overhead and operational costs associated with running a firm as an employee. You’re also not responsible for the debts of your employer. You may earn more money through bonuses and other incentive pay plans, but there is usually little chance of profit or danger of loss. Your extra revenue isn’t considered extra proceeds over expenses, so it’s not considered profit.

As an independent contractor, you would be exposed to some financial risk while also having a greater potential of profit. For example, you may be able to profit if you complete a job ahead of schedule, resulting in savings and the ability to move on to other opportunities more rapidly. If the job takes longer than expected or during quiet periods, you’re likely to make less money. As an independent contractor, you’re also accountable for any debts you incur.

It’s vital to keep in mind that different government agencies and courts may use different criteria to determine whether you’re an employee or an independent contractor. It’s not easy to figure out who is an independent contractor because there are various factors that the courts will weigh in on.

Furthermore, just because you have a formal contract saying that you are an independent contractor does not mean you are one. It’s not enough to agree to work as an independent contractor. Many Tax Court cases have ruled that even if the parties had a formal contract indicating an independent contractor relationship, the actual connection was one of employment.

If you are unsure, seek guidance from a tax accountant. If we are unsure, we’ll all seek some advice from a lawyer, but in most cases experienced tax accountants have enough real world experience to advise you with confidence and help make sure that you file your taxes in accordance with the law while also claiming all the deductions you are entitled to.