Understanding how income is taxed requires a clear distinction between different types of working arrangements. In the eyes of tax law, the way a person works—whether they are an employee or a self-employed contractor—fundamentally changes their tax obligations, the expenses they can claim, and how their income is assessed.
Employment vs. Self-Employment
The primary distinction between an employee and a self-employed person lies in the legal nature of their agreement with the payer.
Contract of Service
An individual working under a contract of service is considered an employee. This relationship implies a level of integration into the employer's business, where the employer holds significant authority over the worker.
Contract for Services
An individual working under a contract for services is considered self-employed. Self-employed individuals often enjoy certain tax advantages, such as a wider range of deductible expenses against their income and the fact that income tax is generally paid much later than it is for employees.
Distinguishing Criteria
Because the label on a contract is not always sufficient to determine status, case law has established several criteria to differentiate the two:
- Control: The degree of authority the employer has over how, when, and where the work is performed.
- Remuneration and Financial Risk: Whether the individual receives a steady wage or bears the risk of financial loss if a project goes over budget or fails.
- Equipment: Whether the employer provides the tools and equipment or if the individual must provide their own.
- Work Performance and Correction: The level of supervision applied and whether the employer has the right to correct the work.
- Holidays and Sickness: Whether the individual is entitled to paid leave or sick pay, which are hallmarks of employment.
- Exclusivity: Whether the individual is permitted to work for other clients or is required to work solely for one employer.
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