Personal Finance

is there any benefit of incorporating while working as IT contractor at low hourly salary?

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  • Dec 5th, 2020 7:44 pm
[OP]
Sr. Member
Mar 6, 2010
520 posts
171 upvotes
Brampton

is there any benefit of incorporating while working as IT contractor at low hourly salary?

Lets say a person gets an offer of a 6 month contract at $50/hour but is required to incorporate. Considering that this really is a PSB as per CRA and the cost of doing corporate taxes plus the other hassles, is it even worth to waste time on such low paying contract jobs?
AFAIK, PSB can be hit with 44% income tax.
What kind of hourly rate & contract duration do you think justifies going for a contract job that requires incorporation?
Will appreciate any advice.
12 replies
Deal Addict
Aug 28, 2010
1245 posts
315 upvotes
Toronto
Going to cost you at least $1500 to setup and do 1 year end worth of accounting, 6 months is a very short term contract.
2 years would make it ideal....

You should ask them about sole proprieter....you still bill the HST ... it shouldnt matter to them..... you just risking if you screw up and they sue you they can come after your assets....
Newbie
Jul 8, 2019
96 posts
98 upvotes
porchemasi wrote: .... you just risking if you screw up and they sue you they can come after your assets....
Even if they incorporate, if they are the sole owner, director, and employee, and don't have any storefront or outside office (i.e. completely doing everything from home), they will probably still be sued personally.

Any plaintiff and judge would see right through that corporate vail if you are a one-person operation, and ignore it.
Deal Guru
User avatar
Mar 23, 2008
12096 posts
8397 upvotes
Edmonton
Speaking as an incorporated IT contractor...

No

Longer answer: They may want you to incorporate to reduce THEIR risk of you being flagged as an employee, which would mean they could be on the hook for holiday pay or even unforwarded CRA payments (taxes or EI). But from your perspective, it's not really worth it unless this is a career move for you, as in, you want to do the contractor thing for an extended period. So even if this particular contract isn't long enough to make it worthwhile, if you plan on taking other contracts for the next two years, it might make sense.

C
[OP]
Sr. Member
Mar 6, 2010
520 posts
171 upvotes
Brampton
CNeufeld wrote:
Longer answer: They may want you to incorporate to reduce THEIR risk of you being flagged as an employee, which would mean they could be on the hook for holiday pay or even unforwarded CRA payments (taxes or EI).
C
This is indeed the reason why most organizations are insisting on incorporated contractors.
However, my concern is that one needs to have a quite high billing rate - something like $75/hour - to take into account the high costs and hassles involved with incorporating.
Please correct me if I am wrong.
Deal Guru
User avatar
Mar 23, 2008
12096 posts
8397 upvotes
Edmonton
luking wrote: This is indeed the reason why most organizations are insisting on incorporated contractors.
However, my concern is that one needs to have a quite high billing rate - something like $75/hour - to take into account the high costs and hassles involved with incorporating.
Please correct me if I am wrong.
If you're doing IT contracting @ $50/hour, you're doing it wrong. IMHO. Might as well be an employee and get holiday/vacation pay, training, benefits, etc. From my "napkin" calculations, that works out to an equivalent employee rate of about $35 to $40/hour, or around $70k/year. And that doesn't take into account any "in between contract" downtime (unpaid time off) or other expenses to do with being a contractor, incorporated or not.

So yeah, you need to have a higher billing rate to make it worthwhile. Only you can calculate that number, though.

C
Newbie
May 8, 2012
26 posts
15 upvotes
Toronto
luking wrote: Lets say a person gets an offer of a 6 month contract at $50/hour but is required to incorporate. Considering that this really is a PSB as per CRA and the cost of doing corporate taxes plus the other hassles, is it even worth to waste time on such low paying contract jobs?
AFAIK, PSB can be hit with 44% income tax.
What kind of hourly rate & contract duration do you think justifies going for a contract job that requires incorporation?
Will appreciate any advice.
Incorporation does not cost much and has longer term benefits e.g. write off of expenses - internet, cellphone etc.
You can even expense a portion of your rent/mortgage as a business expense if that part of your residence is used for business.
You can depreciate your electronic equipment you use for work etc.

It can be done online for less than $500. You don't have to take a salary and pay EI etc. Just take out dividends and make sure you keep some for taxes.
If you do this, remember you can't claim EI if unemployed.

Make sure you register your business with CRA for HST and taxes and you can pay this monthly, quarterly or annually and you can set this up on the CRA website.

$50/hr x 40 hrs a week is $2260 per week including HST at 13%. This is money coming into your business account under your control. I think it is worth incorporating for.
At the very least you start learning how a business works especially tax write-off's.

Once you have this setup, you can use this corp for all other side hustles as long as you describe it's function vaguely when incorporating.

Don't mess with the CRA. Pay your taxes ( Canada is an awesome country).
Collect and send them their HST and they won't hassle you. They understand you are trying to start a business.
Member
User avatar
Feb 16, 2014
346 posts
248 upvotes
mcarfan wrote: Incorporation does not cost much and has longer term benefits e.g. write off of expenses - internet, cellphone etc.
You can even expense a portion of your rent/mortgage as a business expense if that part of your residence is used for business.
You can depreciate your electronic equipment you use for work etc.

It can be done online for less than $500. You don't have to take a salary and pay EI etc. Just take out dividends and make sure you keep some for taxes.
If you do this, remember you can't claim EI if unemployed.

Make sure you register your business with CRA for HST and taxes and you can pay this monthly, quarterly or annually and you can set this up on the CRA website.

$50/hr x 40 hrs a week is $2260 per week including HST at 13%. This is money coming into your business account under your control. I think it is worth incorporating for.
At the very least you start learning how a business works especially tax write-off's.

Once you have this setup, you can use this corp for all other side hustles as long as you describe it's function vaguely when incorporating.

Don't mess with the CRA. Pay your taxes ( Canada is an awesome country).
Collect and send them their HST and they won't hassle you. They understand you are trying to start a business.
Eligible deductions for tax purposes are restricted if corporation is a PSB.
[OP]
Sr. Member
Mar 6, 2010
520 posts
171 upvotes
Brampton
mcarfan wrote: Incorporation does not cost much and has longer term benefits e.g. write off of expenses - internet, cellphone etc.
You can even expense a portion of your rent/mortgage as a business expense if that part of your residence is used for business.
You can depreciate your electronic equipment you use for work etc.

It can be done online for less than $500. You don't have to take a salary and pay EI etc. Just take out dividends and make sure you keep some for taxes.
If you do this, remember you can't claim EI if unemployed.

Make sure you register your business with CRA for HST and taxes and you can pay this monthly, quarterly or annually and you can set this up on the CRA website.

$50/hr x 40 hrs a week is $2260 per week including HST at 13%. This is money coming into your business account under your control. I think it is worth incorporating for.
At the very least you start learning how a business works especially tax write-off's.

Once you have this setup, you can use this corp for all other side hustles as long as you describe it's function vaguely when incorporating.

Don't mess with the CRA. Pay your taxes ( Canada is an awesome country).
Collect and send them their HST and they won't hassle you. They understand you are trying to start a business.
First of all Thanks for a well written detailed reply. Yes it can be useful for someone who truly is doing it for the long term. In my case it was just 6 months. On top of that I have read that CRA can assess such corp as PSB and apply 44% tax. With the accounting cost and tax filing hassle, it seems to me that i was a fool who worked at below minimum wage.
CRA should be more clear and lot more considerate. Whatever little money i spent was spent to earn income, I don't see why they would claim that PSBs cant use deduct such expenses. I don't see anything that I can write off, I am mortgage free and hardly have any cell phone expense. The only expense i can write off is internet.
If i get an account to file the tax, i will end up paying $1000 for 30 mins work. There is hardly anything to write off and hence justify the high cost.
If I do it myself, well god knows what BS will i run into.
Member
User avatar
Feb 16, 2014
346 posts
248 upvotes
luking wrote: First of all Thanks for a well written detailed reply. Yes it can be useful for someone who truly is doing it for the long term. In my case it was just 6 months. On top of that I have read that CRA can assess such corp as PSB and apply 44% tax. With the accounting cost and tax filing hassle, it seems to me that i was a fool who worked at below minimum wage.
CRA should be more clear and lot more considerate. Whatever little money i spent was spent to earn income, I don't see why they would claim that PSBs cant use deduct such expenses. I don't see anything that I can write off, I am mortgage free and hardly have any cell phone expense. The only expense i can write off is internet.
If i get an account to file the tax, i will end up paying $1000 for 30 mins work. There is hardly anything to write off and hence justify the high cost.
If I do it myself, well god knows what BS will i run into.
The history and reason for this PSB limitation was to curb rampant abuse and splitting of income (eg. Professional athletes). It levels the playing field from a tax perspective for those who are employed versus an "incorporated employee."
The key to understanding tax rules is the reason behind the rules.
Deal Addict
May 23, 2006
1023 posts
237 upvotes
Vancouver
A lot of ppl think it saves taxes by incorporating.

It generally doesnt for sole proprietor assuming u need access to those cash right away.

One benefit of incorporating is separate legal liability
Newbie
May 8, 2012
26 posts
15 upvotes
Toronto
luking wrote: First of all Thanks for a well written detailed reply. Yes it can be useful for someone who truly is doing it for the long term. In my case it was just 6 months. On top of that I have read that CRA can assess such corp as PSB and apply 44% tax. With the accounting cost and tax filing hassle, it seems to me that i was a fool who worked at below minimum wage.
CRA should be more clear and lot more considerate. Whatever little money i spent was spent to earn income, I don't see why they would claim that PSBs cant use deduct such expenses. I don't see anything that I can write off, I am mortgage free and hardly have any cell phone expense. The only expense i can write off is internet.
If i get an account to file the tax, i will end up paying $1000 for 30 mins work. There is hardly anything to write off and hence justify the high cost.
If I do it myself, well god knows what BS will i run into.
If you had only one client and only did work for them for years (40 hrs per week for years) then yes CRA could deem your corp are a PSB.
But for 6 months? I highly doubt they care or they can even make such a determination.

How does a small business hire a particularly skilled person for a 6 month project? Do they have to hire and then fire this employee once the project is complete?

At the end of the day, it is your call if the setup hassle is worth it. But CRA etc shouldn't be your deciding factor. iMHO, that is a non issue.

HTH. Keep well

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