Self-Employed VS Personal Services Corporation — Definition & Tax Implications
Are you self employed or a contractor with only one client? If so, here’s how to determine if the CRA considers you self employed versus a personal services corporation.
Read on to determine if your business falls under this definition and the tax consequences.
Personal Service Corporation Vs. Regular Contractor – Understanding the Basics
The CRA defines a personal services corporation as an entity that strives to provide services to another business that a regular employee usually performs. The person forming this entity is labelled as an incorporated employee and not a contractor or self-employed individual.
An independent contractor that provides services the same way an employee does runs the risk of falling under a personal services corporation. According to the CRA, you are an incorporated employee due to the way you operate your business. Therefore, how much control you have over your hours/schedule and whether you own the work tools will determine if you are an independent contractor or an employee.
You are under the client company’s control when the client dictates what you do and how it is done. Thus, the CRA will label you as a personal services corporation. Using a different label doesn’t eliminate the fact that you are an employee according to the government’s point of view.
What Are the Tax Implications of Being a Personal Service Corporation?
You are declared ineligible for standard business expenses — including Small Business Tax Deductions — when you get labelled as a personal services corporation. Therefore, you lose the significant tax rate that small businesses enjoy on the first $500,000 income. You also put your business at the risk of audits for previous tax years — which might be crippling for your business due to increased tax liability.
Personal service corporations are taxed at a rate of 28%. However, small businesses enjoy a significantly lower tax rate of 9%. Businesses — both corporations and sole proprietorships — enjoy numerous tax deductions when compared to employees. The CRA labelling your business as a personal service corporation could, therefore, have serious tax consequences.
How to Avoid Being Labelled a Personal Services Corporation
Take charge of your schedule and work hours to ensure the CRA considers you a self-employed individual or contractor. Having multiple clients and ownership of your work tools will also help distinguish your business from a personal services corporation. Finally, your contracts need to state that you work as an independent entity. Ensure you contact us today to avoid being labelled a personal services corporation.
If you’re looking for an experienced accounting partner who will help you figure out if you’re self employed vs a personal services corporation, and what happens after that, contact us for more information.
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