Employment Status

By Mark C.

MarkpicIn the fluid nature of the animation industry, most workers can encounter a number of different relationships with a prospective employer. Small jobs, relief work, contract, sub contract, volunteer, employee, literally every combination you can imagine can apply to a job. I’ve worked in a number of different circumstances, and the main lesson I’ve learned in all the confusion is that it’s most important to have a solid idea of where you personally stand in the arrangement. There is nothing inherently wrong with any legal working arrangement, it’s just not always well defined, and this confusion can lead to heavy misunderstandings and great financial risk at tax time for the unprepared.

I think it’s important for the animation artist to be aware of the two main distinctions, and to ask themselves if they are either an Employee or Self-Employed? Don’t just ask the studio you work for to confirm your status, you need to look into the definitions of the two and be on a solid footing with them. The government can review your income tax and “recategorize” you, and this could lead to a large tax bill and/or ineligible write-offs.

Employee?

Basically if you are an employee, the studio you work for is responsible for deducting Canada Pension Plan (CPP) contributions, Employment Insurance premiums, and income taxes from their employee’s paycheques.

Self-Employed/Independent Contractor?

Basically if you are self-employed, you are considered to be operating your own business. You would invoice for the work that you’ve completed, you would be eligible for business write-offs, but fully responsible for your taxes owed to the government and your own CPP contributions, and you are likely not eligible for EI.

The CRA (Canadian Revenue Agency) has provided an outline to help define employment status. It’s a series of circumstances that help push the status of the worker in a specific situation towards an answer. The CRA reserves the right to “categorize” an artist based upon their interpretation of this 7 point outline. Here is a sampling:

1) The level of Control the Payer has over the Worker

-Does the payer direct, scrutinize, or control how the work is performed?

-Does the payer control the method used to do the work?

-Does the payer determine the amount of pay?

-Is the worker able to work for other Payers while working for this payer?

2) Whether or not the payer provides the equipment

-Does the payer provide the equipment, programs, tools and supplies?

-Does the worker work from their own workspace, or does the payer provide the workspace?

3) Subcontracting Work

-Can the worker hire assistants, or does the worker have to provide the services personally?

-Can the worker hire a qualified replacement?

-Does the payer have any say in who the worker hires to assist or replace?

4) Financial Risk

-Is the payer responsible for all operating expenses?

-Is the working relationship continuous?

-Is the worker financially liable if they fail to complete the obligations of their contract?

5) Responsibility for Investment or Management

-Does the worker have any capital invested in the business?

-Does the worker have an established business presence?

6) Opportunity for Profit

-Is the worker in a position to realize a profit or loss?

-Is the worker entitled to benefit plans?

7) General Relevant Factors and Contracts

-Does a clear contract exist stating the assumed employment status?

That is just a small sampling of the type of questions CRA use to determine your employment status. I have worked for studios in the past who have treated their artists as freelance independent contractors that would, by this outline, clearly be defined as employees. I’m glad the statute has run out on those income tax years or I could have been in trouble if I was audited. I know a number of people who are still working as ‘self-employed’ that would not qualify if the CRA caught up to them. These individuals would be hit with extra tax debt, interest fees, and penalties, but don’t feel they can risk their jobs at their current studio to demand their proper status.

Studios have advantages and disadvantages to choosing which system works best for them, but for the most part the cheapest preference is to hire independent contractors as they don’t get benefit packages and the studio will not have to remit their share of the CPP contributions. With an independent contractor a studio does not need to hold their share of income tax or pay their share of Employment Insurance.

I have run companies with employees and with independent contractors. The best option for the average animation artist in my opinion is to be an employee. The benefit of collecting EI alone is worth it, as we work in a fluctuating and tenuous industry where most contracts only last for 6-8 months. On the studio side, employees are very expensive to a company, not to mention the extra time and effort to manage a health plan, CRA remittances, and complex accounting. In this era of thin margins and low budgets I can certainly sympathize with a studio’s choice to run a leaner ship, and employee status is often the first thing to go.

There is no ‘right’ option between Employee and Self Employed, but it is critical for the artist to know exactly which one of these they are and why. Don’t take my word for it, download the rc4110 PDF from Revenue Canada here:

http://www.cra-arc.gc.ca/E/pub/tg/rc4110/

The best advice I can give is to suggest you get a personal accountant to assist with your taxes (not H&R Block!), even if you are currently an employee, chances are your status could change with any new opportunity in animation.~M

My Studio http://www.invisibleentertainment.ca/

My Blog http://www.childishpaintings.blogspot.com/

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5 Responses to “Employment Status”

  1. Chris

    What would happen if you are both?? Like you are a full time official employee to some place, and part-time self-employed at night/week-ends? I have often worked like that until now. And I always found it very confusing when EI times come. I don’t consider myself a self-employed since this isn’t my main activity, but can government think otherwise????

    #1115
  2. Amber

    That’s a really great post, thank you!

    #1119
  3. Left Coast

    It should be noted that the onus is on the employer in these situations and that they are the ones who are held liable for illegal contracts. I’ve been informed in the past that I am considered an illegally employed telecommuter in the eyes of the CRA and HRDC and that they will happily go after the companies I’ve worked for to obtain what they believe they are rightfully owed in EI, WCB and Income Tax deductions as well as to ensure I receive qualify to receive EI payments. They consider it tax evasion on the part of the studios when artists are hired as contractors to perform the same work off site as those in house. As yet I have not taken them up on this because I am sure it would be a quick route to being blackballed within the industry and like everyone else I need to eat. I’m not here to rock the boat but it must be stated unless you are calling the shots in the working relationship, in the eyes of the government you are still their employee and your contract is illegal.

    #1120
  4. Mark C.

    Hi Chris,
    I have been both at the same time before too, it can be very confusing. One of the first questions on the EI application is if you’re self employed, and I’ve struggled with this answer. After paying into EI at your job, it’s hard to imagine not collecting it when you need it. I don’t recommend asking an EI agent, I’ve heard they push towards considering you ineligible. If you make considerably less freelancing than your full time job, I think you should consider yourself an employee, if you make a significant amount in your freelance endeavors similar or more than your employee income I would not think EI would be an option. Your accountant could answer this question, and there may be an anonymous FAQ phone line with EI.

    Thanks Amber!

    Hi Left Coast,
    I agree that the employer is liable in these circumstances, but not exclusively liable. The government can decide where to get their pound of flesh in any ratio between the two parties (especially considering these deductions are shared between employer and employee), and if you research this issue on websites or through the CRA their language is absolutely clear that you are responsible to understand your personal status and can be held accountable. In many instances the shady companies that offer these types of arrangements do not last long, or cannot financially withstand fines or fees. If the CRA can’t get their chunk from the bones of a bankrupted ‘fly by night’ company, they are well within their rights to pursue the individuals. Being a whistleblower could be very dangerous to your career, and I don’t recommend it, but I believe that the CRA tries to offer anonymity to an informant. I’m not suggesting an aggressive attitude towards the studios, as they are often in a tight spot, but I believe that true respect for the artist can’t be achieved if the lowest common denominator studios are allowed to grow and are rewarded with a free pass for their underhanded employment practices.

    #1123
  5. This was an awesome post Mark, thanks! I have had questions about this subject for many years, but especially since i have jut recently started working freelance. I know many people who am going to direct to this post. Thanks so much and keep up the great work with your contributions and thanks Mike for keeping this site as awesome as it is.

    #1124
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