Is it worth while switching from Employee to Self-Employeed?

[iherald]

I have the potential to switch from being an employee to being self-employed with the same employer. Setting side the requirements of the government to determine which you are, is there a real advantage?

I don't have a car, so I can't write it off. I can write of a portion of my house, and I don't feel that comfortable writing off a lot of meals (like a lot of people I know do).

I know that I will pay twice the CPP, limit my entitlement to EI, get rid of severance pay, etc.

What are people's thoughts?

[MoneyGal]

For the same income, you will likely pay less in tax. But you're giving up something, too - the employee-employer relationship. If your employer wants to sever the employment relationship with you, the company should pay you a "regular" severance in keeping with the common law standard in your province.

Also - you didn't mention benefits, but if you have them through your employer, you will lose them, too.

I'm not saying you should or should not do this - but you are taking on more risk (no longer sharing it with the employer) with the expectation that you will pay less/keep more of your earnings. Some of the things you might be giving up (particularly benefits) are VERY costly to replace at the same level, because you are no longer part of a group. Only you know whether it is "worth it" to you or not to move to self-employment. Good luck in your decision!

[Young&Ambitious]

If you are incorporating you will pay EI and CPP (employer and emplpoyee portion) as you will be considered an employee of your corporation. If you are going to be a sole proprietorship EI is elective (but on the flipside you cannot claim EI benefits) and you pay CPP one portion only. There's also the health savings account you may be able to take advantage of as a sole proprietor (although *likely* not initially) or immediately as a corporation. Opportunities may exist for tax splitting. Are you going to school or wanting to further your education? If your tax rate is higher you will want to have the corporation claim this as a business expense as the deduction would be greater than the credit (note: cannot be achieved as a sole propietor and must be in the interests of the business etc etc). Do you require all of your income or could some be kept in the corporation and taxed at the corporate rate? I could go on and on...

Unfortunately, there is no quick easy answer, it really depends on your situation and weighing out the pro's and con's.

[marina628]

My friend worked for a small company for many years in the trades industry.He was convinced it would be good for him to become a contractor .He lost his WSIB benefits ,ability to collect EI etc.He fell down a small staircase only 4 steps but enough to twist his back and be off work 2 months.He was financially ruined by it.If you own more than 50% of a corporation I don't think you are eligible for EI.My husband owns 61% of a business and he does not pay any EI deductions.

[Young&Ambitious]

For clarification purposes:

Marina, I would guess your husband is not an employee of his corporation. If he was he would be paying EI.

[MoneyGal]

If you are going to be a sole proprietorship EI is elective (but on the flipside you cannot claim EI benefits) and you pay CPP one portion only.

Sole proprietors pay both the employee and employer portions of CPP. The employer portion is deductible from earnings and the employee portion gives rise to a credit - but you mos def pay both portions on eligible income.

[MoneyGal]

For clarification purposes:

Marina, I would guess your husband is not an employee of his corporation. If he was he would be paying EI.

If you control more than 40% of the voting shares of a corporation, you are considered uninsurable for EI purposes.

http://www.servicecanada.gc.ca/eng/e...employed.shtml

[marina628]

My husband is an employee of the corporation and because he owns 61% is not eligible for EI.

[Young&Ambitious]

Thank you for posting the link MoneyGal, I was unaware of that ownership rule! On a rainy day I'll have to break out the ITA as the website is rather vague and I can see the scenarios and details getting rather compex, or rather more interesting

[Plugging Along]

It comes down to a few things on your specific situation. If you have a very high income, then there are some tax advantages to incorporating. You can do the income splitting, leaving money in the company, dividends vs salary etc. There is also a question of liability, if you need a legal seperate entity if you are it a high litigation or risk area.

However, you also lose the all the security of EI, and benefits, etc. We are incorporated, and my spouse works at as a consultant. We factor in the lost of vacation pay, sick pay, statutory holiday pay, benefits, etc. We are both have been in high income brackets. If I had the choice for a self employed position vs. employee position, for the same pay, I choose employee. The rate I use, is about double my current hourly salary amount to determine my consulting amount.