Employee vs. Self Employed: Criteria and Considerations

For the majority of income earners, employment status is pretty evident.  If you are going to the same place every day,  have an assigned cubicle with a computer and a corporate stapler, and you have a boss that tells you what you need to do, chances are you are an employee.  Conversely if you have several clients, use your own laptop, and are worried about where your next sale is going to come from, you are probably self employed.

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Criteria to determine Self Employment:

There are, however, some workers whose status is not that apparent.  For example you may work from home and use your own computer, but you report to one entity, where someone supervises and directs your work.  In these cases a determination needs to be made as to whether you are an employee or self employed.  It is not enough for the person paying you to determine your classification ; often, payers are biased as they may not want to take on the financial costs and responsibilities of having an employee (explained below).  As such, when in doubt about your status, it is helpful to answer the following questions:

• Do you have control over how the work is done i.e. do you work independently without anyone overseeing your work?

• Do you have more than one "client"?

• Are you allowed to take on other clients whenever your choose?

• Can you subcontract your work?

• Can you decline to do work?

• Do you provide your own tools and equipment?eg. do you use your own computer, are you responsible for paying for software subscriptions, are you responsible for repair or replacement of your work tools if something breaks ?

• Do you market yourself?

• Can you hire someone else to do the work without approval from someone else?

• Do you bear the risk and responsibility for the work done i.e. if it is not done properly will you still get paid?

• Is there a written contract detailing the terms and conditions of the work?

• Do you invoice your client?

• Have you been hired for a specific job?

If you answer yes to most of these questions, then you are most likely self employed.  While checking every criteria is not necessary to define a self employed worker, the determination is usually a question of fact.

Why Is it Important to Distinguish between an Employee and Self Employed Worker

So, why should you care about what category you fall under? There are actually several differences that, when faced with a choice between being and employee or an independent, are important to understand:

• An employee often has certain entitlements including laws against wrongful dismissal;vacation and severance pay and other perks including company contributions to health insurance, pension and life insurance plans. The self employed have to bear these risks and costs on their own.

• In addition to calculating collecting and remitting employee payroll taxes, employers are required to pay additional taxes for their employees. Self employed individuals are responsible for calculating and remitting their own taxes.

• Employees are entitled to employment insurance benefits whereas EI for business owners who are self employed people, if eligible at all, are subject to different contributions rates and benefits.

• The self employed are allowed to claim certain business related deductions against their income including home office expenses, automobile expenses and telephone costs, thereby reducing their income taxes. Employees may be entitled to these types of deductions but on a more restricted basis.

• If is often easier for employees to get loans, mortgages and credit cards as they are perceived as having greater income stability. Self employed workers often have uneven income streams and greater risk of collection which can impact negatively on their ability to get credit.

Although, there is more effort, risk and responsibility that goes along with being self employed, there is also greater control, potential for profit and flexibility.  An employee on the other hand enjoys more stability with a regular paycheque and has much less to do in the way of administration , but does not have as much leeway in terms of what he or she earns.  

Additional Reading:

• CRA Discussion Employee or Self Employed

• California law tightening the rules to be considered Self Employed

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services.

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