Employee Versus Self-employed: What to Expect Tax-wise

Written by:
Chris Arsenault, BBA, MRSB Chartered Accountants, Charlottetown, PEI, DFK Affiliate Firm

Think you could make more money as an owner than working for someone else? Before you take the plunge, there are some important changes to consider. From a financial perspective, some of the biggest changes you will face when starting out as a self-employed individual include how the Canada Revenue Agency (CRA) treats you.

Claiming Expenses

Employees typically do not claim expenses, since employers generally pay for everything. Some exceptions include the use of your vehicle or an office space in your home. In these cases, your employer signs a T2200— declaration of conditions of employment—that allows you to claim expenses that are required as part of your job.

When you are self-employed, you can claim all business related expenses. While some expenses are clearly business related, others fall into a grey area. Perhaps you use a room in your house to meet with clients occasionally. Maybe you use your vehicle for business and personal use. What if you take a business trip but extend your stay to visit family? The CRA has guidelines to help business owners determine what they can deduct as an expense.

Record Keeping

As an employee, you are typically not expected to track income or expenses; that’s your employer’s job. As your own boss, you are required to do this yourself or to hire someone to do it for you. You will need to track income and expenses, both for yourself and any employees, so that everything is accurate at tax time. If you have staff working for you, you must track hours worked, remit payroll deductions, and prepare annual T4 slips. The better your record-keeping, the smoother your business will run. By keeping a handle on all business records, you will be able to determine your profitability in a timely manner, instead of scrambling to find the right information when something goes wrong. And, if the CRA decides to audit your business, you will thank yourself immensely for being well organized.

Payroll

Once your business starts to grow, it may be time to hire an employee or two. Employers incur additional payroll costs beyond wages and vacation pay, such as Workers’ Compensation Plan premiums, and the employer’s share of Canada Pension Plan (CPP) and Employment Insurance (EI) premiums. These premiums are based on how much your employees earn during the year. Other possible payroll costs include health and dental benefits and pensions plans. These costs should be considered in preparing your budget.

Goods and Services Tax (GST)

You can voluntarily register for HST to recover the HST on purchases while starting your business. You must register for HST if your gross sales exceed $30,000 in any month or in any 4 calendar quarters.

Be Ready for the Income Tax Bill

As an employee, income tax and CPP are deducted before you get your pay cheque. At tax time, you should generally owe very little. You may even receive a refund! When you are self-employed, you pay taxes out of your business profits. As an Alberta resident, if your profit is $53,600, then your income tax would be $9,089. You must also pay both parts of the CPP premium. That is an additional $4,960. You would owe $14,049 to CRA that is not automatically withheld and remitted from your self-employed earnings. It is important to plan for your new obligations as a self-employed individual. Failure to do so may result in a painful tax bill. If you would like to discuss these topics further please contact one of the members of the KMSS tax team.

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