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



## iherald (Apr 18, 2009)

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 (Apr 24, 2009)

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 (Aug 11, 2010)

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 (Dec 14, 2010)

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 (Aug 11, 2010)

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 (Apr 24, 2009)

Young&Ambitious said:


> 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 (Apr 24, 2009)

Young&Ambitious said:


> 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/ei/information/self_employed.shtml


----------



## marina628 (Dec 14, 2010)

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


----------



## Young&Ambitious (Aug 11, 2010)

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 (Jan 3, 2011)

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.


----------



## Cal (Jun 17, 2009)

^ mat leave is a big one for alot of women. That alone could make or break such a decision depending upon their age, and where they are in life and career.


----------



## 44545 (Feb 14, 2012)

iherald said:


> 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?
> 
> ...
> 
> What are people's thoughts?


iherald,
I don't know who your employer is but I do know a number of public servants who have "retired" but have come back on contract while collecting pensions. It's quite lucrative for them.

I don't get the impression that's your situation though, is it?

I find "contractors" are treated more like disposable resources than employees. I'm not implying that will happen in your case, only that I've seen it happen, and been a contractor before.

I have friends who enjoy contracting and can handle the perceived insecurity. 
Personally, I'm in my mid-30's and nowhere near retirement and I'll take a sure thing over a gamble. I prefer to be an employee and have some sense of security, along with the power of a large benefits plan covering me.


----------



## iherald (Apr 18, 2009)

Thanks for everyones advice. It is a situation where it's the first step towards partnership in a professional corporation, so I would be an independent contractor. At the end of the day the firm says a bit of money on CPP but they say they do it as a favour to the lawyers who can start to write stuff off.

The only thing I could realistically deduct would be a home office, which would allow me to write off $2000 or thereabouts. 

A few people I know don't pay EI, which is fine and would save me $700 and a few others don't pay CPP. But if I'm not mistaken, I have to pay the employee portion and the employer portion. Do I get to write any of that off? If not, I think it negates must of the savings I'd have.


----------



## MoneyGal (Apr 24, 2009)

See my earlier post - no. 6 in this thread - for your answer.


----------



## iherald (Apr 18, 2009)

MoneyGal said:


> See my earlier post - no. 6 in this thread - for your answer.


You're right, I did see that and then forgot. So I pay both sides and get the employers side back when I file my taxes but I'm not sure what you mean about the credit for the employees side? I won't be incorporated...


----------



## MoneyGal (Apr 24, 2009)

A tax credit. Credited at the federal rate of 15%. Your total taxes owing (if you owe) are reduced by 15% of the employee-side premiums paid - just as they are now, if you are an employee now.


----------



## iherald (Apr 18, 2009)

MoneyGal said:


> A tax credit. Credited at the federal rate of 15%. Your total taxes owing (if you owe) are reduced by 15% of the employee-side premiums paid - just as they are now, if you are an employee now.


Sorry, so toe summarize, during the year I'll have to pay more CPP because I'll pay both sides, but when my taxes are done I'll pay the same I pay now (since I'll get the employer side returned and get the same credit I get now). 

So from a CPP perspective, employee vs self-employed is a wash. Interesting.


----------



## MoneyGal (Apr 24, 2009)

No, a deduction is not quite the same as money in your pocket.


----------



## thegoose (Feb 25, 2012)

I have the same question, but my situation is not straight fwd. I own a fifth of the company that currently employs me. I earn a very good salary and feel I pay too much tax. If I start up a second company that I own 100% and employ myself through the second company I can still earn the same income and pay less tax. I want to save tax by taking out a reduced salary from my second company and giving myself a shareholders loan to pay off my mortgage. Is this possible or is it a trap? How does the loan amount get taxed? I suspect somewhere down the line the company has to?


----------



## KLOC (Feb 29, 2012)

I think things are changing in 2012 with regard to the PSB Rules and who is deemed to be an "incorporated employee" as opposed to an independent contractor.

http://www.bdo.ca/library/publications/tax/taxfactors/2004-03a.cfm


----------

