Becoming self-employed, and starting your own business have been increasing in popularity over the years. With the downturn in Calgary market, we’ve seen an increase in business licenses in the past year or two – basically ever since oil has crashed. When I speak to my colleagues out in Toronto the sentiment is similar, it’s 2018, and there are a lot more start-ups and entrepreneurial souls… millennials want to change the world and add value and this is how they are planning on doing it.
Being self-employed is challenging, and while on the outside looking in it can seem glamorous, there are many times where it is anything but that. There are times when you might have to skip a paycheque, eat KD for dinner, and stay up late wondering if there is any possible way to make this work.
When individuals decide to take the leap and start their business they have the option to stay self-employed or incorporate. There are reasons to do one or the other, with a lot of it dealing with risk. Many entrepreneurs and small business owners tend to cut down costs wherever they can. With that has come anything that might be optional and the number one item that comes to mind is whether or not to pay Employment Insurance (EI).
What is EI?
EI or Employment Insurance is a percentage of your earnings that is withheld from your paycheck (this is assuming you are an employee) that is remitted to the government. Should you lose your job or decide that you want to go on maternity/ or parental leave, you will be entitled to 55% of your earnings up to a maximum of $55,000 per year, which ends up being about $900 every 2 weeks. Now typically you don’t plan on losing your job, but generally, you have at least 9 months to get your finances in order once you find out that you will be bringing a new human into the world.
There is a gross misconception that self-employed people don’t qualify for EI, this is just plain wrong, and should be considered bad advice. Self-employed individuals are entitled to EI provided that they continue to pay their EI premiums to the government.
Let’s do the math.
Currently, in Canada EI caps out at $800 a year, which is about $67 per month. The benefit you’ll receive if you choose to have a child is $21,600 over the year. While that might not cover all of your expenses in a year of parental leave, it certainly makes the burden easier to bare. If you are going to need to save up for leave, having 20K as a starting point is a step in the right direction.
Now let’s say you want to have two children, that means over the time period where you are having kids you’re going to receive $43,200 from the government. If you pay $800 a year in EI premiums from the time you are 25 to 35, (which would likely be the time you start working full-time and look to start a family), you will end up paying $8,000 for $43,200 of benefits. Even if you end up paying $800 for the 40 years you work (25-65) you will pay $32,000 into EI and still receive $43,000 in benefit. You can’t argue with math.
How do I sign up?
The CRA website isn’t the most straightforward thing to follow, but lucky for you, I’m here. You will need a My Service Canada Account (MSCA) which you can sign up for HERE.
Remember, EI and CPP premiums are not the same and self-employed individuals are not required to pay the employer portion of EI as they would be with CPP. EI is completely optional, but not an optional item I think you should pass up on. Once you sign up your first payment will be due with your tax return in the following year. After that, if you’re paying tax in quarterly installments your EI premiums may be included in that payment. For more information on exactly what EI will cover head on over to the full EI overview.
Going through a huge life change, such as losing your job, or bringing a child into the world is a stressful and a very expensive time, which means it’s so important to set yourself up for financial success so that you can actually spend time focusing on what’s important.
Canada still has a long way to go when it comes to maternity/paternity benefits but that being said it’s imperative you take advantage of this benefit that is afforded to all Canadians. So go sign up!