Full time employee to contractor

[Euro838]

Originally posted by Sugarphreak
I've done both, and one thing I can say is there is it has to be calculated out. Too many people approximate this shit without real numbers to back it up.

If the staff position has very few benefits (no RSP matching, only 3 weeks vacay, you have to pay a little bit per month for your own insurance... etc) when you consider the stat holidays and sick time, the difference is about 15$ per hour in end value (assuming you are taking advantage of the tax benfits contractors get by taking dividends)

List of things to consider:
11 Hours of Stat holiday
Vacation Pay
Sick Days
RSP Matching
Stock Options (maybe)
Value of CPP & EI (to you - your employer pays double yours)
Employee Life Insurance
Employee Long/Short Term Disability
No severance pay (or 2 weeks notice)
Cost of WCB (300$/yr)
Cost of company renewal (50$ per year)
Cost of liability insurance (~300$ per year)
Cost of own insurance programs (mine is ~1500$ and it is very light)
Taking dividends or wage? (significant tax differences here)
Write-offs?

Best thing to do is sit down with a spreadsheet and work it out. I will say this, the RSP matching is one of the more important things to consider.

One thing to note is that generally the contact rate relieves the company of EI, CPP and WCB payments so this generally means your end value is better as a contractor. Of course if you are going through a 3rd party like Design Group or something that cuts into this... personally I only contract direct for that reason.

Other things to add to the list are:
Training and development
Career progression
Career Opportunities i.e. overseas work (ex-pats)

You really have to assess and analyze on what these are of value to YOU. Everyone here will have a different opinion and valuation on all of these points.

As a career progression/aspiration example, look at the VPs or Senior VPs of your organization (not sure how mature your organization is) and how many of them have been an employee for an extensive time before getting those positions i.e. 10+ years ?

It all depends on the individual and what matters to them.

[Sugarphreak]

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[Euro838]

Originally posted by Sugarphreak


Training and development, yes to some point… as a contractor you really shouldn’t be accepting any kind of training paid for by the company. It puts you in danger of being assessed as an employee by CRA.

That said, even when I was staff I might have gotten five or six thousand in training over like 8 years... and most of it just getting certified in whatever the safety program of the week was so I can go to site

For career development and overseas work, not really. I have done overseas work as a contractor, so it isn’t limited to just staff. I also disagree that going contractor can impact you career development, I know of a lot of high level people in managing positions who are still contractors. if you were being considered for a VP position then they would just ask you to go staff.

I'm sure there are many cases and exceptions where senior managers are still contractors but I think in large organizations i.e. market cap > 5 billion, you will find fewer cases.

Anyways, my point is to just add these items to your list of considerations. Depending on the person or the position, there may be more valuation for these items.

[Mibz]

Do it, learn from the experience and make future decisions based on that experience.

Better you try it now while you're young than be forced to choose 20 years from now when you've likely got more riding on your work. If you try now and it turns out it's not for you, no big deal. If the offer comes again in the future you'll be better prepared to make the best possible decision for yourself and your situation.

[msommers]

Originally posted by CapnCrunch

Dodging a psb is easy. If an employee can't figure that out, then they should probably stay staff.

I'm all ears.

[CapnCrunch]

Originally posted by msommers


I'm all ears.

I have a list of stuff from my accountant, but I think it's at home. I'll take a look for it tonight.

It's mostly fairly simple stuff like printing business cards, setting up a company website, identifying each individual project and client on your invoices, carrying your own insurance, etc.

He's already had a guy that was audited by CRA as a PSB and ended up making them look stupid.

[Sugarphreak]

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[CapnCrunch]

Originally posted by Sugarphreak
printing business cards, No
setting up a company website, No
identifying each individual project and client on your invoices,No
carrying your own insurance, etc. No

This stuff has either nothing or very little to do with being assesed as a PSB

Accountants generally think they know what they are talking about, but really don't have a clue when it comes to this stuff. If you take the above items as your justification for claiming the small business deduction and you will get laughed out of the court room.

Leading case on this is Wiebe Door Services where the judge outlines specific tests (4 actually) to determine if the company is a personal services business. All judges will refer to this in any case that goes to court. Probably one of the most important things for any contractor to do is print that (it is online and for free) and understand it... then you can structure your company and conduct business in a way that supports it.

Biggest factors include having multiple clients, ownership of tools, financial risk, and ability to do your own work. In other words, if the company sets your hours, gives you a work station, provides an office, gives you any kind of training, and you get a steady paycheck... your odds of winning are very bleak.

If I am not correct, prior to this case the previous leading case stated that your business needs to be an accessory to another... not a critical part of it.

Dodging a PSB assesment right now is extremly hard as an office contractor, and it really comes down to what mood the judge is in. Your best defence is to keep your write off's low, change up your income patterns once in a while, and fly under the radar as much as possible.

So identifying individual clients on invoices is wrong, but having multiple clients helps? I've billed to over 15 clients on 45 different projects over the past 5 years.

No offense, but as I said before, my accountant just went through one of these. He's given me his recent real life experience with it. Nobody in O&G has been successfully prosecuted in this city.

I'm confident in the they way I run my business, and if CRA wants to spend $100,000+ taking me to court to get the ~$20,000 per year that they think I owe them, then they're more than welcome too.

[triplep]

Originally posted by Xtrema

Sure you pay less in income tax (14% under $500K as small business) vs 30% average for $90K. But that only offset the extra work you have to do to keep books and pay a CA every year to go thru them as well. You must have enough in company to pay CRA every quarter. And as Speedog said, you may want to find a few clients as well as a single client may not go over well.

Hu? How do you figure you pay 'less' tax?

[Sugarphreak]

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[Xtrema]

Originally posted by triplep


Hu? How do you figure you pay 'less' tax?

Making $90K as employee in Alberta:

http://www.tax-services.ca/canadian-...or-canada.html

$23K in taxes


Making $90K as small business in Alberta:

1) Pay youself minimum, say $20K, tax = $1807

2) $90K - write off $10K as expenses - $20K wages = $60 small business income, tax = $8400 (14%)

3) After 2, you will have ~$50K in the company. Say you need to access that as dividends, say $40K. You pay 10.21% on that = $4K.

1+2+3 = ~$14K in taxes.


So at $90K of income, staff vs contractors you can save $10K of taxes per year. And $90K doesn't even get you into the top income tax bracket yet.

And the saving get even better if you make more as income are taxed at 25%-39% in AB, while dividend are taxed at 10%-27%. (And I'm over simplifying dividend as well as that's the non-eligible rate)


* I am not an accountant, I may have got some of that detail wrong.

[triplep]

Originally posted by Xtrema


Making $90K as employee in Alberta:

http://www.tax-services.ca/canadian-...or-canada.html

$23K in taxes


Making $90K as small business in Alberta:

1) Pay youself minimum, say $20K, tax = $1807

2) $90K - write off $10K as expenses - $20K wages = $60 small business income, tax = $8400 (14%)

3) After 2, you will have ~$50K in the company. Say you need to access that as dividends, say $40K. You pay 10.21% on that = $4K.

1+2+3 = ~$14K in taxes.


So at $90K of income, staff vs contractors you can save $10K of taxes per year. And $90K doesn't even get you into the top income tax bracket yet.

And the saving get even better if you make more as income are taxed at 25%-39% in AB, while dividend are taxed at 10%-27%. (And I'm over simplifying dividend as well as that's the non-eligible rate)


* I am not an accountant, I may have got some of that detail wrong.

Close, but you aren't comparing the same numbers. Leaving 10k in the business would effectively be the same as me earning 10k less in business income. You would need to pull out all your money in the corp to make it comparable.

So lets do that...

90k = 23k in taxes as you have indicated meaning i get to keep 67k in after tax money.

90K in a businesses

Make 90k in a business, have 10k in expenses and pay yourself 20k in wages, as you have indicated your business income would be around 50k after tax, and the taxes you would owe would be around $8,400.

Now the fun part is the personal tax, 20k in wages + 50K in dividends (grossed up by 125% = 62,500) you would pay taxes on $82,500 of income personally. Using the calculator (as you can't calculate just on each amount separately, as the calculator will apply the basic personal amount in each case thus reducing your taxable income) we would have to pay $20,700 in taxes. We will get the dividend tax credit so this reduces are taxes owing by $8,200. Meaning personally we would have to pay $12,500 in taxes.

$8,400 + 12,500 = 20,900. So yes there is some tax savings involved but only $2,100. Furthermore, my take home cash would be 67k as an employee, but only 61,600 as a business, which means I keep more cash in my pocket at the end of the day.

[Sugarphreak]

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[Mibz]

Originally posted by Sugarphreak
and I don't have to pay into useless programs like EI or CPP

Wait, whaaaaaaaaaaat?

Y'all motherfuckers need to teach me.

[msommers]

If you're incorporated you don't have to pay CPP. If you're a sole prop you have to pay both employer and employee amounts (which I think is $4600 total?), which is a write-off. EI I don't think you have to pay if you're self-employed under either, I'll check my financial statements.

As for the PSB, Sugarphreak outlined it perfectly, with multiple clients being THE most important factor with financial risk being second and the others close behind. My accountant told me the biggest reason why the CRA is starting to really look into this more closely is because lots of people who are basically employees, are dodging CPP and EI and getting major tax breaks through paying themselves via dividends and a very meager salary (to avoid income taxes). You can also setup your spouse as a shareholder paying out dividends and get more breaks that way for you as a household.

In the end it's a sweet deal if you can get it to work. But I'm a sole prop for the very reason I'm not willing to take the risk because I have had the same client for awhile, have no spouse, and am not in a financial position to have money sit in the company (mostly because I want to spend it ). It's all about prolonging and slightly reducing the amount of tax you'll pay over the long term.

[Mibz]

I just realized that, while I account for them when saving for taxes, I might not be paying them. I trust TurboTax to do the right thing :P

[triplep]

Originally posted by msommers
If you're incorporated you don't have to pay CPP.

It has nothing to do whether you are incorporated or a sole prop. The factor that decides if you pay CPP is how you take the money out of your corp. If you take it out by way of wages (like a normal employee would, every month, tax remittances to the CRA, etc.) Than yes, you will pay CPP. If you take it out through Dividends there will be no CPP.

[msommers]

As a sole prop, you can pay yourself in dividends? News to me.

[triplep]

Originally posted by msommers
As a sole prop, you can pay yourself in dividends? News to me.

No - Your original reply made it like you didn't have to pay CPP in a corp, because it was a corp, but you had to pay CPP in a sole because it was a sole. I was just clarifying that it isn't the fact that it is sole vs. corp. It is the way you take money out of your corp that dictates whether you pay CPP or not.

[msommers]

Ok now we're on the same page You're right I wasn't very clear on that so thanks for clarifying for others.