FA-5.4 - Employee vs Self-Employed: Costs, Records & Irregular Income

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FINANCIALLY AESTHETIC · GUIDE 26/37
EMPLOYEE VS SELF-EMPLOYED: COSTS, RECORDS & IRREGULAR INCOME
FA-5.4 · Income, Work & Making Money Young
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Spoiler: THREAD SONG

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WHY THIS PAYS

Work status changes who carries tax, insurance, equipment, downtime and record-keeping costs.

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Criteria for Distinguishing Between an Employee and a Self-Employed Worker

To determine whether a worker is an employee or a self-employed worker, the case must be analyzed based on certain criteria.

These questions concern the following elements:

• the payer’s level of control over the worker’s activities;
• whether the worker or the payer provides their own tools and equipment;
• whether the worker can subcontract the labour or hire assistants;
• the risk level for financial risks assumed by the worker;
• the level of responsibility for investments and management assumed by the worker;
• the worker’s potential for profit;
• any other relevant factors, such as written contracts.

Tools, Equipment, and Investment

Determine whether the worker owns and provides the tools and equipment needed to perform the work. What matters is the extent of the worker’s investment in tools and equipment, as well as the replacement cost, repair costs, and insurance costs. It is highly likely that a worker who has made this type of investment will retain the right to use these assets, which reduces the payer’s control over how the work is performed. Also, such a significant investment could expose the worker to financial losses.

Self-employed workers often provide the tools and equipment necessary to perform a contract. Consequently, the fact that the tools and equipment are owned by the worker is most often associated with a business relationship.

However, employees may also be required to provide their own tools. The courts have recognized that even if a worker is required to own their own work tools, they should not automatically be considered a self-employed worker.

Indicators that the worker is a self-employed worker:

• The worker provides the tools and equipment necessary to perform the work. In addition, the worker is responsible for the fees for repair, insurance, and maintenance of the tools and equipment.
• The worker has made significant investments in tools and equipment and retains the right to use these assets.
• The worker provides their own workplace, is responsible for the fees associated with that location, and performs a significant portion of their work there.

Financial Risk: The Most Concrete Distinguishing Factor

Assess the level of financial risk assumed by the worker. To do this, determine whether the worker incurs monthly fixed expenses or costs that are not repaid.

Typically, an employee does not face financial risk, as all expenses are repaid and they do not incur recurring fixed expenses.

However, a self-employed worker may face financial risk and incur a loss, as they usually have to pay fixed monthly costs even when they have no work in progress.

Both employees and self-employed workers may be repaid for business or travel expenses. Therefore, focus on expenses that are not repaid by the payer.

Indicators that the worker is an employee:

• The worker is not usually responsible for operating fees.
• As a general rule, the employment relationship between the worker and the payer is ongoing.
• The worker is not held financially liable if they fail to meet the obligations set forth in the contract.
• The payer selects and controls the method of payment as well as the amount payable.

Indicators that the worker is a self-employed worker:

• The worker hires assistants to help them perform their work. The worker provides compensation for the hired assistants.
• The worker performs a significant amount of work from their own workplace and bears the fees associated with operating that workplace.
• The worker is hired for a specific job and not on a permanent basis.
• The worker is held financially liable if they fail to meet the obligations set forth in the contract.
• The worker receives no fringe benefits or protection from the payer.
• The worker advertises their services and solicits potential clients on their own.

Potential for Profit and Loss: Income vs. Profit

Determine whether the worker can make a profit or incur a loss, as this indicates that the worker controls the business aspects of providing their services and that a business relationship is likely to exist. To be able to make a profit or incur a loss, a worker must have potential income and expenses, one of which may exceed the other.

Employees generally do not have the opportunity to make a profit and do not risk incurring a loss, even though their compensation may vary depending on the terms of their contract of employment. For example, employees who are paid on commission or a piece-rate basis, or employees whose contract includes a clause granting them a productivity bonus, can increase their income based on their productivity. This increase in income is not usually recognized as a profit, as it does not represent a surplus of income over expenses.

Employees may have expenses directly related to their job, such as automobile expenses and the costs of housing and meals. Usually, these expenses do not put the employee at risk of incurring a loss, as they are unlikely to exceed the employee’s compensation.

Self-employed workers generally have the opportunity to make a profit or incur a loss because they have the ability to seek out and accept contracts they deem appropriate. They can negotiate the price of their services (or set it unilaterally) and have the right to offer those same services to more than one payer. In general, self-employed workers bear the expenses necessary to fulfill the terms of the contract and manage those expenses to maximize their net earnings. Self-employed workers can increase their income and/or reduce their expenses in order to increase their profits.

Generally, employees do not share in the profits earned or the losses incurred by the payer’s business.

Indicators that the worker is an employee:

• The worker is generally not in a position to realize a profit or incur a business loss.
• The worker is entitled to fringe benefits normally offered to employees, such as a registered pension plan, a group insurance plan for accidents, a health insurance plan, or a dental insurance plan.

Indicators that the worker is a self-employed worker:

• The worker may hire a replacement and provides compensation to that person.
• The worker’s compensation consists of a fixed fee, and the worker bears the expenses incurred in providing the services.

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Invoicing as a Self-Employed Individual: Required Information

As soon as a transaction takes place between two businesses, issuing an invoice is mandatory. This invoice must generally be issued upon delivery of the goods or completion of the services.

If the customer is a private individual, issuing an invoice is mandatory only in the following cases:

• at the customer’s request,
• for distance sales,
• or for intra-Community deliveries exempt from VAT.

An invoice is thus a detailed statement of services rendered or goods sold. It must meet certain formal requirements:

• be issued in duplicate if provided on paper,
• include a number of detailed items of information.

The mandatory information in the general section includes, in particular:

• the date the invoice was issued;
• a unique number for each invoice, based on a chronological and continuous sequence;
• the date on which the delivery of goods or the provision of services is made or completed;
• the identity of the seller or service provider: full name, address, business identification number;
• the identity of the buyer or customer: full name, customer’s address (unless the customer objects in the case of an individual), billing address if different;
• the purchase order number, if one was previously issued by the buyer
• for each item of goods delivered or service rendered: the quantity, the precise description, the unit price excluding tax, the applicable VAT rate, or, if applicable, the fact that the transaction is exempt.

Regarding price and payment, the following must also be included:

• the amounts excluding tax and including all taxes;
• price reductions (discounts, rebates, or other reductions that are applicable and quantifiable at the time of the transaction);
• the billing address, if different from that of the corporate headquarters;
• the date by which payment is due or the payment term, the terms for early payment discounts, the penalty rates in the event of non-payment or late payment, as well as a statement regarding the flat-rate indemnity of 40 euros for collection fees in the event of late payment.

Certain specific statements must be included depending on the seller’s situation: if the seller is subject to the VAT exemption threshold, the statement “VAT not applicable, Art. 293 B of the General Tax Code” must appear.

Invoices issued or received must be retained for ten years as accounting documents.

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Record keeping: The Fundamental Obligation of the Self-Employed Worker

You are required by law to record all your transactions in your accounting records and to be able to account for the source of all your income and expenses. Records include accounts, agreements, ledgers, charts and tables, diagrams, forms, images, invoices, letters, cards, notes, plans, statements, reports, telegrams, supporting documents, and any other evidence containing information, whether in writing or in any other form. In general, you must keep your records for at least six years from the end of the last tax year to which they relate.

You must record your day-to-day expenses and income in your accounting records. Keep your deposit slips, bank statements, and voided checks. You must maintain separate accounting records for each business you carry on.

There are benefits to keeping complete and organized accounting records. For example:

• You can easily identify the sources of your income from various sources. Proper accounting records can help you prove that certain income does not come from your business or is not taxable.
• You won’t overlook any expenses you can deduct when filing your tax return.
• You’ll have a clear understanding of your business’s past and current financial situation.
• You can identify trends in your business, create budgets, and find it easier to obtain loans from banks and other lenders.
• You’ll avoid problems that might arise during an audit of your tax returns.

If you do not keep all the required information and do not have other supporting documentation, your income may have to be calculated using alternative methods. Deducted expenses may also be disallowed if you cannot support them. Penalties may apply if you do not maintain adequate records.

You must keep records of the gross income earned by your business. Gross income is the total revenue before deducting expenses, including those related to goods sold. Your income records must include the date, amount, and source of the income. You must record all income, whether you received money, goods, or services. Each entry must be supported by an original document, which may be a sales invoice, a cash register receipt, a receipt, a bank deposit slip, a fee statement, or a contract.

Whenever you incur a business expense, always keep your receipt or invoice. The document must include:

• the date of purchase;
• the name and address of the seller or supplier;
• the name and address of the buyer;
• a complete description of the goods or services;
• the seller’s business number if they are registered for GST/HST, when the purchase price is $100 or more (pre-tax).

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Business Expenses and Deductibility: When Does the Right to Deduct Begin?

You must begin reporting your income and may deduct your expenses when your business begins. Each situation must be evaluated based on the facts. Generally, your business is considered to have begun when a significant activity commences. This activity must be a normal business activity or an activity necessary for starting the business.

Suppose you are conducting research on how to start a business with the intention of eventually carrying on a specific type of business. This is not considered a significant activity that is a normal business activity. Therefore, the business is not considered to have started when you began your research. In this case, you cannot deduct the expenses incurred to conduct your research.

Suppose you decide to purchase enough goods for resale or equipment to start your business. Such a decision indicates that you have started your business. From that point on, you can normally deduct all business expenses you incurred to earn income. You can still deduct these expenses even if, after all your efforts, you have to cease your business operations.

All Belgian self-employed individuals who are natural persons may choose to deduct either actual expenses or a flat-rate deduction (30% of income).

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Irregular Income: How Tax Rules Account for It

A practical method for smoothing out variable or irregular income

Variable and irregular income can pose challenges when creating a budget because budgeting requires estimating income.

If your employment income is irregular or variable, we recommend that you save money when your income is higher to offset months when your income is lower. That is, cover your basic monthly expenses and, if possible, set aside the rest of your money in an emergency fund for the coming months. That way, if you have a shortfall, you can draw on your savings.

To save money during the months when they earn more, Émilie and Steve cover their basic monthly expenses first, and then, whenever possible, set aside the rest of their income for the coming months.

When estimating your income, you should plan your budget based on your normal working hours or your regular pay. You should only include income you are certain to receive, because overestimating your income can easily mislead you, causing you to overspend and create other financial problems.

Self-employed workers do not have the guarantee of a stable income that hourly, daily, or weekly employees do. This is why tax systems provide different mechanisms depending on the type of income.

Farmers, fishermen, and self-employed commission-based salespeople may use either the cash basis or the accrual basis of accounting. All other self-employment income must be reported using the accrual basis of accounting.

When you use the accrual method, you must:

• report your income in the tax year in which you earn it, regardless of when you receive it;
• deduct your expenses in the tax year in which you incur them, regardless of whether you pay them during the same tax year.

Regarding estimated tax payments, a self-employed worker may be required to pay an estimated tax payment if they meet both of the following conditions:

• their main source of income is from self-employment in agriculture or fishing;
• their net tax owing for each of the three years exceeds $3,000

In practice, this system of quarterly or annual estimated tax payments serves as the primary official tool for managing income that varies from one period to the next: it spreads tax payments over time rather than requiring a single payment based on income that has already been spent.

In Belgium, the social insurance fund applies the same principle of deferred adjustment: provisional contributions paid over the course of the quarters are subsequently adjusted - upward or downward - once actual income is known two or three years later, which absorbs part of the impact of irregular income on social security contributions.

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YOUR NEXT MOVE

Price self-employed work for the costs you now absorb and keep business records from the first payment.

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CURRENT-RULES CHECK

Legal protections, tax rates, reporting duties, deadlines and product rules change by country and over time. Use the jurisdiction labels in this guide and check the linked official source before acting.

Spoiler: ◇ BACKUP LINKS

• Canada Revenue Agency - Employee or self-employed? - Canada - work-status factors.
• GOV.UK - Business records if you're self-employed - United Kingdom - record keeping.
• IRS - Tax tips for gig-economy workers - United States - gig-work tax.