Fable Friday: Self-Employment Pitfalls

Brian was a bit apprehensive when the boss called a meeting of all the dry wall hangers late on a Friday afternoon. He said to Bill, “Nothing good ever happens when the boss wants to see you on a Friday afternoon. Man, every time I have been fired it was on a Friday.”

Bill replied, “Don’t worry so much, the boss wants to see all of us. We have a lot of work on right now, no way he is firing everyone. Maybe we are all getting a raise.”

“I might be a pessimist but you are delusional! Wait and see, some trouble is heading our way,” said Brian sadly.

The small office filled up pretty fast with workers, many of them looking seriously dusty. They had taken their coveralls and hats off but you could see that they had been sanding drywall during the day. There was a low murmur of guys talking to each other when Colin stopped in the doorway and said, “Ok — listen up everybody!”

“I have been talking to my accountant and we are going to be making some changes around here that are going to be good for everyone. Starting at the first of the month you guys are going to be off my payroll. You are all going to be self-employed. This is a good thing because it means that you are going to be able to take more deductions. You will be able to write off part of your house as your office and you can deduct for vehicle expenses for driving from your house to the job site. I will pay you the same hourly rate as I do now.”

No one said anything for a while and finally Colin said, “Anyone got any questions?”

Brian, although relieved no one was getting fired was still uneasy about the conversation, but he was not the kind of guy who spoke up when he was in a group. So nobody asked any questions and Colin closed the meeting by saying, “You will see, being self-employed is going to be much better than being an employee.”

Bill says, “See Brian, nothing to worry about, some smart accountant has figured out a better deal.”

Brian responded, “I’m not so sure. How could it be better for us and for the boss? Seems to me somebody has to be worse off and I’m thinking it would probably be us.”

“Naw, I think the person who will be worse off is the tax man and I like the sound of that,” Bill replied.

Time passed and the first self-employed paycheques were handed out. Bill was pretty excited and said to Brian, “You are going to have to admit that you are wrong about this idea. I have a much bigger cheque than I used to get when I was an employee. The boss is really on to something.”

“Yeah my cheque is bigger too. I did think of a problem though. If we aren’t employees and Colin runs out of work we won’t be getting any EI,” Brian replied.

Bill disagreed, “I don’t think that’s true. I know there is a Self-Employed Benefit Program with the government, so I don’t think you have to worry about that, and besides we got a pile of work.”

April rolled around and Brian’s wife Carol asked him for the T4 from work. Carol usually had to nag Brian a couple of times before he remembered to bring any paperwork home. This time though Brian said that he did not remember getting a T4.

Brian wanders into the office to check on the T4 and asks Sally (Colin’s assistant) if she knows where the T4’s are. Sally says there are no T4’s this year because you are all self-employed. Uh-oh thinks Brian. Carol is not going to be happy if I don’t bring the form home today, and he was right. Carol was pretty annoyed that she had not heard anything about this change to self-employment until now. Brian’s reply was, “Well, I have more money now that I am self-employed. I paid cash for that new four wheeler in January — we never could have done that back when I was an employee!”

“Well genius,” Carol says, “How do we do your tax return without a T4?”

“I don’t know, let’s call someone who does taxes and find out,” Brian responds.

John at Taxes R Us was very helpful. He told them that what they needed was a total of all of the money Brian had been paid and a summary of the expenses. He even gave them a checklist to fill in with all of the categories; like home office, vehicle, supplies and meals. When Brian looked at the checklist he thought some of this was going to be hard to figure out. The check list asked for the total of all the gas receipts for the year. That part was going to be easy because Brian did not have any gas receipts. When he put gas in his truck, he usually did not bother to even rip the receipt out of the machine. Then there was supplies — Colin provided all the supplies he needed and he had not worked for anyone else’s during the year. He did know that some of the guys had other customers. How many kilometres had he driven this year for business — that was going to be hard to figure out.

Brian asked Sally the next day if she had a way to printout the money he had been paid during the past year and any tax deductions. She said “Sure — you are not the only one who has been asking! You guys don’t keep track of anything! Come back at the end of the day and I will give you the list.”

“Great, thanks Sally,” Brian replied.

Carol was not as excited to see that the list added to over $50,000 of income and that no amount of tax had been withheld. She knew enough about tax to think that there was going to be a problem. However, she told Brian to drop that paper off to John at Taxes R Us in the morning.

Three weeks later Brian gets a phone call from Taxes R Us letting him know that his return was ready for pick up and signature. He did not ask any questions and the person who called did not volunteer any information.

Brian dropped in to Taxes R Us a couple of days later. The front desk person, a perky blonde who looked pretty tired asked him his name and brought him his paperwork. She said, “Here is the form T183. You need to sign this and then we will e-file your return with Canada Revenue Agency. This paper is the remittance form that you can take to the bank to pay your taxes, or you can mail it with your cheque.”

“Ok — do I owe taxes?” Brian replied.

The blonde laughed a little as she said, “You sure do! The amount you need to send to Canada Revenue Agency is just over $11,000.”

Brian paled and said “That cannot be right. I am self-employed and it is less tax when you are self-employed!”

Blondie said, “Well some of the money you owe is for Canada Pension Plan. As a self-employed person you are the employee and the employer, so you are paying around $5,000 is CPP and the rest is federal and provincial sales tax.”

Brian says, “Well I am not signing this form. I need to talk this over with my wife and John. Can you set up an appointment for me?”

When Brian told Carol that he owed more than $11,000 in income tax, she started to cry then she got mad. “That god damn Colin she said. He lied to you about this being a better thing for you. You are paying all this CPP, you’re paying his part of the CPP. Did he ever mention that to you when he was going on about how much better being self-employed was? Huh, Did he!!”

“No,” said Brian — “I don’t remember any talk about CPP. I don’t remember him telling me I could not deduct my truck expenses, or that I had to keep track of anything. All he said was that it was going to be better!”

Yeah Carol said, “Better for him.”

A week later Brian and Carol are meeting with John at Taxes R Us. John is being sympathetic. He says a lot of people do not understand about being self-employed. Employees get a pay cheque with tax, EI and CPP already deducted. Self-employed people get money that no one has taken any deductions from it. It’s harder for self-employed people because they look at their bank accounts and don know how much of the money is theirs and how much actually belongs to the government for tax and for CPP.

“What are we going to do about this tax bill?” Brian says.

John says, “How much of this can you pay right way?”

“Almost none of it. We have not been busy at work lately and I have not saved any money. I was not thinking that I had any taxes that had to be paid!” Brian exclaimed.

“Well” John said, “There is never a good year to pay two years income taxes. CRA charges interest on all the money you owe them and they compound that interest each day. So they are not the guys you want to owe money to. Can you borrow the money you need to pay the income tax and CPP?”

“I don’t know. I guess I can check at the bank,” replied Brian.

That was how Brian found himself waiting outside the office of his banker. Not really his banker, since he had not ever talked to the guy before, but it was the bank where he had a bank account. Apparently the bank guy was named Colin and to Brian’s eye he looked at lot like a guy who spent his time behind a desk.

“Hey Brian, nice to meet you, come on in and have a seat,” said Colin offering Brian a hand.

“Thanks, nice to meet you too,” replied Brian, although he was lying.

“What brings you in to the bank today,” asked Colin.

“Well” replied Brian, “I need to borrow some money.”

“I hear that a lot,” said Colin with a smile. “How much money are you looking to borrow and what do you need it for?”

“Well — my main problem is that I have a personal income tax bill due at the end of the month, of around $11,000 and I don’t have the money. It is kind of a long story but the main issue is that I was working for a guy who did not tax any deductions from my pay,” said Brian.

“How is that legal?” asked Colin.

“Well apparently I am self-employed so I am supposed to be sending in my own deductions. I was not really sure about how this works. I just got self-employed this year.”

“Ok, well that sounds like a major problem. You have an accountant?” asked Colin.

“Yes, I just got one. That’s how I know that I have this big tax bill,” Brian replied.

“Ok, so let me tell you the party line around here on lending people money to pay their income taxes.” Said Colin. “Basically, we don’t do it. The issue is that we give you the money to pay the tax, you pay the tax and then if you don’t pay us, we don’t have anything we can repossess,” explained Colin.

“That sucks,” said Brian. “My accountant told me that no one charges more interest than CRA and if I don’t pay them they are compounding the interest every since day. Basically a person who owes CRA money will never get ahead of it.”

“Well” said Colin, “What else do you have? Maybe we can lend you some money on your house or a car?”

Brian replied, “Well I don’t have a house and my truck is a piece of junk.”

“What else do you own?” asked Colin.

Brian brightened up a little and said, “I bought a four wheeler back in January, paid cash for it. $16,000 with taxes and all.”

“Ok” said Colin, “Now we are getting somewhere. What we need to do is make a list of everything that you own and everything that you owe and see what your net worth is. Then we can see if you have enough of a net worth that we can loan you the money. Likely what we will do is to take a mortgage on the four wheeler and you are going to have to make monthly payments on this loan.”

“Sounds like a plan,” replied Brian. “Lets do it.”