Are You an Incorporated Employee?
In the past few weeks, this discussion has popped up a few times in my world as an accountant, leading me to write on this subject as I feel it is incredibly important. We get lots of calls here at our Devon office asking us to help our clients make this distinction.
If you have been hired by a company and that company requires you to incorporate to perform your services for them and if it was not for the existence of the corporation you would be an employee, you may be deemed an incorporated employee.
An incorporated employee is also known as a personal service business (PSB). A personal service business is not eligible for the small business deduction and the expenses it can deduct for tax purposes may be restricted compared with other corporations. Taxable income earned inside a personal service business increases the tax rate to about 13% higher than the general corporate rate. When you factor in the additional tax that must be paid when income is distributed as dividends, in almost all cases, operating through a PSB will mean total tax paid will be significantly greater than if you had earned the money directly as an employee.
If your corporation employs more than five full-time employees or provides services to an associated corporation, it is generally not considered a personal service business.
There are steps you can take to protect yourself from the designation by the Canada Revenue Agency as a personal service business. Some of these include the following:
There should be a contract in place making a clear distinction of the relationship between the two companies. Who holds the risk if the contract isn’t filled or who is responsible for the operating expenses for performing the duties;
Make yourself available for hire by other clients. The more clients you have, the better;
Issue invoices and maintain “the books” of operations;
Have liability insurance coverage for your company;
Have a public image of your company through advertising, business cards, marketing, etc.;
Are you independent from the company that has hired you? Do you have control over the work you perform? For example, can you make your own hours, do you supply your own tools, are you invested heavily in the services you are providing? These items should be addressed in the contract.
There should be an expectation to profit;
Maintain a business license and have your business registered for GST;
Maintain a separate bank account, email address, business phone.
Having an incorporation should not be viewed as evidence alone for proof of an independent business relationship. Personal service businesses that file their taxes as small business corporations, could face significant tax consequences. Please ensure you assess the nature of your business and discuss your situation with a tax professional.
If you have any questions regarding how to classify your business or services, please give us a 780.987.HOLT(4658) or please email us here email@example.com