My employer classified me as an independent contractor without my knowledge and required me to work 9-5, Monday to Friday, for almost half a year. I did my taxes under the impression I was an employee and now the CRA says I owe them upwards of $8,000.
Is there anything I can do?
If I’m understanding you correctly, you’ve been treated as if you’re an employee but paid as if you’re self-employed. And to be honest, if the person you worked for did not withhold income tax, Canada Pension Plan and Employment Insurance premiums, and didn’t issue you a T4 (as opposed to a T4A or no slip at all) reflecting those figures, then there’s not a lot you can do.
If it helps, be aware that you’d have had to pay substantially the same amount of tax as an employee as you are paying as a self-employed person. The main difference is that an employer withholds it from your pay so it’s pre-paid to CRA up front, while a client pays you the full amount and you pay your taxes from that. That’s why you’re getting a tax bill now.
Self-employed people pay a little more CPP
I said that you’re paying substantially the same amount as you would have as an employee, but in fact you take a ~5% hit as a self-employed person.
Both employees and self-employed people pay into CPP. For an employee, the employee pays half and the employer pays the other half. But when you’re self-employed you’re the employer as well so you pay both halves. The total CPP premium comes to around 10% in total, so a self-employed pays the full 10% vs only 5% for an employee. Based on this, in terms of amounts owing there can be a disadvantage to being self-employed.
Self-employed people can also deduct expenses
The flip side is that you may be able to deduct business expenses (thus lowering your overall tax bill) if you incurred any allowable business expenses in order to do your work.
On your tax return, you would report your pay and your expenses on form form T2125 Statement of Business or Professional Income, so that you’re only taxed on the net profit from your work.
(One other advantage: if you report this as self-employment income – and you should – you have an extended tax filing deadline to June 15. And remember, you should always file your return on time even if you can’t pay yet.)
You’re not in trouble, but your ‘client’ may be
What you’re describing is technically a mischaracterization by your ‘client,’ as they were certainly treating you more like an employer would treat an employee. Some companies do this in order to avoid doing proper payroll (and of course to avoid paying into EI or CPP for you). It’s wrong, and you can report them to CRA for it.
Be aware however that you will still owe the tax, and even if CRA acts against your employer it probably won’t have any real benefit to you. If they get investigated and are found to have mischaracterized you as a contractor when you should have been an employee, they’ll be forced to issue T4 slips showing tax withheld, and the amended slips may require you to amend your own tax return. Your tax liability for whatever you earned from the payer may change by that 5% (see the CPP paragraph above) but that’s about it.
Got tax questions? Get in touch.