When you run a business, you need to consider costs and expenses, revenues, taxes, business structures, etcetera. A common question is how to carry on your business. But this isn’t only limited to sole proprietorships, partnerships, and corporations. Many entrepreneurs are further confused about whether they are independent contractors or self-employed.

This article outlines the differences between these roles and how insurance and tax considerations may come into play.

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What’s the difference between independent contractors and self-employed individuals? 

Unlike the frequent independent contractor versus employee debate, where someone is “either-or”, independent contractors are a subset of self-employment. Self-employment means you’re earning money without being someone’s employee, and this definition also fits independent contractors. However, not all self-employed people are independent contractors.

An independent contractor explicitly provides a service to someone on a contractual basis. You could be asked to design a logo, renovate an office, or sell a product as an independent contractor. However, suppose you’re selling a widget to anyone looking for it. In that case, you could still be self-employed but not an independent contractor because you’re not contracting with a specific client through your business process.

Related: Common claims every contractor should know

Insurance requirements for independent contractors versus self-employed

There’s no “one-size-fits-all” solution. Self-employed people need insurance depending on their particular line of work. For example, a gym owner may need various liability insurance policies and property insurance. In contrast, an e-commerce entrepreneur who works from home may have different insurance needs.

This further applies to independent contractors. A graphic designer’s insurance needs, ultimately differ from a personal trainer’s insurance needs.

For independent contractors, it’s essential to understand the details of your client contracts. Some contracts require having specific insurance policies ready. Additionally, agreeing to an indemnity clause may mean you agree to cover any loss, damage, or liability suffered by another party (usually your client). As a result, signing an indemnity clause is a good reason to purchase liability insurance. Then, if a client exerts their indemnity-clause rights to cover any loss or damage, your insurance could cover the fallout. It’s best to speak to a lawyer or insurance broker to learn more.

Related: Does general liability cover independent contractors?

Tax considerations for independent contractors versus self-employed

Similar to insurance, the intricacies of your taxes differ depending on what your business does. As a self-employed person or independent contractor, you can generally deduct the expenses used to run your business, such as a laptop or phone or even the gas you use to get to meetings or worksites.

Independent contractors should be aware of what category they fall under, an independent contractor or an employee. If the Canada Revenue Agency (CRA) ultimately determines that you’re an employee of an organization and not a contractor, you could lose your ability to deduct expenses from your income. This can have a drastic effect on your after-tax income.

In determining whether you’re a contractor or employee, the CRA considers factors such as the degree of control the client has on you, whether the relationship is one of subordination, regularity of work schedule, and more.

If you’re self-employed (including independent contracting), you should see an accountant for more information on how you’re taxed and arrange your affairs in the most tax-efficient manner.

Independent contractors are ultimately a subset of self-employment. Regardless of your business or practice’s category, it’s crucial to figure out the proper insurance and tax implications to ensure you’re not liable to losses, damages, or unforeseen taxes.

Related: How much does general contractor insurance cost?

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