Employee vs Self-Employed: Which Is Right for You?

Many Canadians ask whether it’s better to work as an employee or as a self-employed contractor. Often people assume self-employment automatically saves taxes, but that isn’t always true. The classification of your working relationship — whether you are an employee or a contractor — depends on the actual arrangement and responsibilities between you and the payer, not just how you prefer to be labeled.

What factors determine employment status?

The Canada Revenue Agency (CRA) distinguishes between a “contract for services” and a “contract of service” when deciding whether someone is self-employed or an employee. Understanding that distinction helps clarify tax obligations, benefits eligibility and other legal responsibilities.

What is a contract for services?

A contract for services describes a business-to-business relationship. In this setup, the person or company you hire provides a service as an independent business. They operate independently, decide how to deliver the work, and are not under your direct control. Examples include hiring a contractor to renovate a bathroom or engaging a company to clear snow from a driveway.

What is a contract of services?

A contract of service describes an employer-employee relationship. The employer sets the terms of employment — including schedules, work methods and supervision. Examples include hiring a cook for a restaurant or a cashier for a retail shop, where the employer controls many aspects of how the job is performed.

How to determine if you are employed or self-employed

When there’s uncertainty, the CRA evaluates several key factors to determine the nature of the working relationship. The primary considerations are:

1. Control: Who decides how, when and where the work gets done? If the payer controls these elements, the relationship is likely employment.
2. Tools and equipment: Does the worker supply their own tools and equipment? Contractors usually provide and maintain their own tools; employees typically use equipment supplied by the employer.
3. Ability to subcontract or hire helpers: Self-employed people generally can subcontract or hire assistants, while employees normally cannot without permission.
4. Financial risk: Self-employed individuals bear business expenses, risk of loss and responsibility for profitability. Employees usually are not exposed to business losses and often have expenses reimbursed.
5. Investment and management responsibility: Contractors typically invest in their business and have a visible business presence; employees generally do not.
6. Opportunity for profit: Self-employed workers can increase profits through business decisions and may incur losses. Employees generally earn set wages or salaries and have less direct control over profit potential.

Another practical indicator is the number of clients: someone genuinely self-employed tends to have multiple clients, while a worker who provides services to a single payer is more likely to be considered an employee.

Should you incorporate if you’re self-employed?

Incorporation can be useful in certain situations. If your business carries substantial liability or if you want to separate personal and business risk, incorporating can limit personal liability. It also makes sense when there are partners, shareholders, or a need to raise capital, since a corporation provides a clear ownership structure.

One commonly cited tax advantage of incorporation is the ability to leave earnings inside the corporation and take advantage of a lower small business tax rate on active business income. That can allow more funds to remain invested in the business for growth. However, incorporation isn’t automatically the best tax choice for everyone.

For many incorporated owners, personal tax-preferred accounts — registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), and similar vehicles — remain important. If the amount you expect to retain in the corporation is small, incorporation may not be worthwhile solely for tax reasons. Non-tax benefits, such as limited liability or easier capital raising, can justify incorporation in other cases.

It’s also worth noting that corporations and sole proprietors generally face similar rules for claiming legitimate business expenses. The major difference is that self-employed individuals can claim more business-related deductions than employees can. Misclassifying an employee as a contractor and claiming business expenses can trigger CRA scrutiny and result in denied deductions.

Self-employed vs. employee

Your classification affects more than just which expenses you can claim. It changes how income tax is remitted to the CRA, whether you must remit installments, and how contributions to the Canada Pension Plan (CPP) are handled. It can also affect eligibility for Employment Insurance (EI) and entitlements such as termination pay or severance under employment law.

In some cases, the working conditions can be adjusted to make the arrangement more clearly self-employed or more clearly employment, but you cannot simply choose the status that gives you the best tax outcome. The facts of the relationship are what matter.

If the status remains uncertain, either the payer or the worker can request a formal determination from the CRA to clarify whether the relationship is one of employment or self-employment.

Read more about careers:

• Common questions from newcomers about working in Canada
• Micro-credentials in Canada: Is it worth it to upskill?
• Do I need a GST or HST number?
• How to become a contractor: The real costs