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General Employee/Self Employed Tax Scenario
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Atlantic Offline
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Post: #1
General Employee/Self Employed Tax Scenario
Fictional Figures

Employee Ed is employed under a big company. He gets benefits and dental.

Works for a day rate of $630. On top of that me makes a flat year salary of $40,000.

Business Bob is self employed.

He makes a flat rate of $780 daily for the same work.


Lets say a typical work year is 220 days. Employee Ed makes $178,000. Business Bob makes $171,600.


Using Alberta rates:
Provincial Tax: 10% of taxable income - $17,800
The using the tax calculator here Ed would pay $28,800 on Federal Tax also.

$178,000 - (17,800 + 28,800) = $131,400 income, $46,600 in tax.



How would Business Bob expect to fare in comparison?

Can someone break down how he could best set up his business (paying himself a minimal wage while keeping maximum money in the business etc.) to maximise his income.

I don't know if this is a really basic scenario or not but I would really appreciate some analysis on this kind of scenario. I see the self employed business set up being promoted on here a bit and I want to possibly make the switch. I just picked these figures (which are not unrealistic for Alberta).

Also can things like your apartment/further education/dental be wrote off. How creative can accountants really get?

Thanks for any feedback in advance.
(This post was last modified: 07-15-2014 12:48 PM by Atlantic.)
07-15-2014 12:47 PM
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Jack Of All Trades Offline
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Post: #2
RE: General Employee/Self Employed Tax Scenario
Write offs reduce your taxable income, it's not a direct increase in after tax income. Also you have to check which classification of business you are in and also liabilities that go along with it as well. If your in alberta your going to have to pay WCB insurance, etc.
I'm assuming your doing a sole proprietorship so all the income from tax is flowing to you because then you'd be taxed at a individual's tax rate. You would also have to pay for EI, CPP, etc. Benefits go through an insurance company, if not you can write off medical expenses, same with education.

Living abode can be written off, but I wouldn't get too carried away with it usually if your self employed you write off a room in the house and convert it to rent and write it off, if your in a apartment it's a percentage.
07-15-2014 01:16 PM
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Dr. Howard
Atlantic Offline
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Post: #3
RE: General Employee/Self Employed Tax Scenario
Thanks Jack.

So whats the best way forward. I am planning on talking to a recommended accountant guy next time Im back in town.

The Directional driller beside me (200k+yr) says he usually ends up paying half the tax an employee would pay.
07-15-2014 01:26 PM
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Dr. Howard Away
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Post: #4
RE: General Employee/Self Employed Tax Scenario
The tax advantages are good but one monumental tradeoff of being an employee vs. contractor is workers compensation insurance, especially in a resource field like oil and gas or logging where people hurt themselves on a regular basis. At least carry some serious disability insurance if you are self employed.

Also factor in the loss of vacation pay when going from an employee to contractor, thats a 4% loss.

Why do the heathen rage and the people imagine a vain thing? Psalm 2:1 KJV
07-15-2014 02:43 PM
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Atlantic Offline
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Post: #5
RE: General Employee/Self Employed Tax Scenario
I actually dont get holiday pay.
07-15-2014 03:34 PM
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nomadicdude Offline
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Post: #6
RE: General Employee/Self Employed Tax Scenario
I don't know about Canada but in the US Business Bob would pay less in taxes, possibly significantly less. First, he can deduct all his "business expenses" which if he is smart includes a lot of shit that really is personal but disguised as business expenses. He'll have formed an S Corp and use it as a pass thru entity so that he does not have to pay FICA taxes on all of his income. He can just take wages out of the business of around 50k, paying FICA taxes on that portion, and then take the remainder as dividends and just pay ordinary income tax.

Finally, and perhaps most importantly, he can set up his 401k so that his total employer and employee contribution is 17.5k a year PLUS an additional 25% of his additional compensation so under your example he would probably be able to give around 40k to his 401k plan, part of which is tax free (the employer contribution would be tax free).

So all in all Bob would pay less in taxes than the employee. This is for America only which of course has exceedingly favorable taxes for business owners (mostly so that Republican finance types can completely rape the system).
(This post was last modified: 07-15-2014 06:04 PM by nomadicdude.)
07-15-2014 06:03 PM
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Jack Of All Trades Offline
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Post: #7
RE: General Employee/Self Employed Tax Scenario
In regards to the accountant I think it depends on his expertise and the type of business structure you want to incorporate yourself as. If your sub contracting the best scenario is doing a sole proprietorship, however that opens a whole can of worms in the trades/construction/resource industry if something goes bad if your not insured. There's also the corporation for self contracting, I know that doctors do that to protect themselves from malpractice suits. In both cases deductions and taxes differ so choose choose your business structure wisely.

Also you can deduct a lot of personal expenses as business, but you gotta be careful what it is to avoid an audit. Food and eating out expenses are the most easily deductible, however if you start putting multiple vehicles and writing them off with only one employee which is yourself your asking for a visit from the CRA.

Case study:
*assuming sole proprietorship and basic deductions etc.
from CRA:
"In 2014, for every $100 you earn, you will need to contribute $1.88 in EI premiums up to a defined maximum—the same amount that employees pay. This means the most you will pay in EI premiums for 2014 is $913.68."
CPP: your contributing 9.9% if your self-employed, the max percentage this is based upon is $51,100
Max contribution is $4,712.40 per year. It's also paid after net income.

Business Bob makes 171,600$ which is his total taxable income a of now.

Deductions:
Vehicle: he drives a truck it's depreciation is calculated by Kms driven by business vs personal. Let's say you used it 70% of the time 0.7 X 5000(*assume) = 3500$ written off. see: http://www.cra-arc.gc.ca/E/pub/tp/it521r...#P100_7334

eating out, say 1250$ month (kind of realistic considering LOA is around 45-70$/day) = 15000$

Rent: you have an apartment that's 1200$/month you write off 50$ so 600 X 12 = 7200$

Total deductions = 25700$
171600-25700= 145900

Tax payable at 171600 = 52793$
Tax payable at 145900 = 42770$

10023$ in difference
- 4712(CPP) - 913.68(EI) = 4397.32$

This is a very quick rundown and I ignored WCB and other insurances and there could be numerous other write offs, anything that is used to generate income can be written off, I'm not sure about gas expenses, insurance I think can be written off for your vehicles, etc.
07-15-2014 07:15 PM
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tarquin Offline
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Post: #8
RE: General Employee/Self Employed Tax Scenario
(07-15-2014 06:03 PM)nomadicdude Wrote:  I don't know about Canada but in the US Business Bob would pay less in taxes, possibly significantly less. First, he can deduct all his "business expenses" which if he is smart includes a lot of shit that really is personal but disguised as business expenses. He'll have formed an S Corp and use it as a pass thru entity so that he does not have to pay FICA taxes on all of his income. He can just take wages out of the business of around 50k, paying FICA taxes on that portion, and then take the remainder as dividends and just pay ordinary income tax.

Finally, and perhaps most importantly, he can set up his 401k so that his total employer and employee contribution is 17.5k a year PLUS an additional 25% of his additional compensation so under your example he would probably be able to give around 40k to his 401k plan, part of which is tax free (the employer contribution would be tax free).

So all in all Bob would pay less in taxes than the employee. This is for America only which of course has exceedingly favorable taxes for business owners (mostly so that Republican finance types can completely rape the system).

It's not a round number of $50,000. It is based on "reasonable compensation." If you have a very profitable S-Corp, reasonable compensation may be in the 100's of thousands.
07-15-2014 07:29 PM
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nomadicdude Offline
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Post: #9
RE: General Employee/Self Employed Tax Scenario
(07-15-2014 07:29 PM)tarquin Wrote:  
(07-15-2014 06:03 PM)nomadicdude Wrote:  I don't know about Canada but in the US Business Bob would pay less in taxes, possibly significantly less. First, he can deduct all his "business expenses" which if he is smart includes a lot of shit that really is personal but disguised as business expenses. He'll have formed an S Corp and use it as a pass thru entity so that he does not have to pay FICA taxes on all of his income. He can just take wages out of the business of around 50k, paying FICA taxes on that portion, and then take the remainder as dividends and just pay ordinary income tax.

Finally, and perhaps most importantly, he can set up his 401k so that his total employer and employee contribution is 17.5k a year PLUS an additional 25% of his additional compensation so under your example he would probably be able to give around 40k to his 401k plan, part of which is tax free (the employer contribution would be tax free).

So all in all Bob would pay less in taxes than the employee. This is for America only which of course has exceedingly favorable taxes for business owners (mostly so that Republican finance types can completely rape the system).

It's not a round number of $50,000. It is based on "reasonable compensation." If you have a very profitable S-Corp, reasonable compensation may be in the 100's of thousands.

Yeah, didn't mean to make it sounds like 50k was the proper number but I think anything in the 40k to 60k range is a safe range if you are making in the 100k's. People get in trouble when they simply do not pay anything to themselves as wages or a really low amount like 15k. And yeah, if the S-Corp is generating 300k or more then 50k may not do the trick but I think the worse thing that happens is the IRS recharacterizes a portion of the non-wage comp as wages subject to FICA and you pay a modest penalty so in some ways it is worth risking it. I hate the IRS for having ambiguous standards like this that are impossible to interpret.
(This post was last modified: 07-23-2014 04:14 AM by nomadicdude.)
07-23-2014 04:07 AM
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Jack Of All Trades Offline
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Post: #10
RE: General Employee/Self Employed Tax Scenario
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/s...u-eng.html

list of deductible business expenses. This is strictly for sole propriotorship which is the easiest to work with. Only incorporate when you make >1mil that's the rule of thumb when I talked to a corporate lawyer a while back because it's only worth it then because of the costs of maintaining a corporation or LLC. Main difference is that you are not personally liable, but there's drawbacks you need a lawyer to represent you in court and you also pay a corporate tax rate.
08-02-2014 09:02 PM
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Richiavelli Offline
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Post: #11
RE: General Employee/Self Employed Tax Scenario
I can't really speak for Canada, but if you are going to have a shell company where you "pay yourself" in the US do it as an S-Corp. You avoid self employment tax this way.

I think you lack to mention the type of business the people are doing. If you really are your own consultant, setting up a shell works. If you're a VP in a fortune 500 company, makes no sense.

Expense accounts/company pays for your shit vs. tax return write offs. Choose what you want.
(This post was last modified: 08-03-2014 10:03 PM by Richiavelli.)
08-03-2014 10:03 PM
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