Let's avoid challenges with the CRA/IRS, shall we?

If you're new to independent consulting or still in the planning stage of launching your business, you might not yet be aware of how important it is to establish your employment status in the eyes of tax authorities.

In both Canada and the United States (and likely other countries), there can be significant tax consequences if the CRA / IRS determine that your relationship with a client is more like that of employer/employee.

So what can you do to ensure you are considered a self-employed independent consultant? A quick summary of considerations is presented below. Please note this is not legal advice; please consult with your lawyer and/or accountant to get advice on your particular circumstances.

1. Degree of Control

Self-employed individuals have the ability to work independently, direct their own work, and choose when and for whom they work. Consider working for at least two different clients in any given fiscal year to avoid the impression that you are operating like an employee to a single client.

2. Tools and Equipment

Self-employed individuals typically provide all of their own equipment (laptops, cell phones etc.) required to fulfill their work for a client. Try to avoid using a client's equipment unless it's absolutely required.

3. Financial Risk

Self-employed individuals face financial risk, in that they will not be paid if they do not fulfill the obligations of their contract. They also do not receive any benefits or protections from clients.

You might run into trouble if the tax authorities determine your relationship with a client is like that of an employee; therefore I'd encourage you to educate yourself on this topic as you launch your business.

Canadians can find further details and considerations on the CRA website; Americans can do the same on the IRS website.

Have questions about launching a consulting business? I'd love to hear from you - drop me a note at [email protected].