EI coverage for the self-employed

One of the commonly stated drawbacks for being self-employed is the fact that the self-employed person does not qualify for employment insurance (EI).

One of the commonly stated drawbacks for being self-employed is the fact that the self-employed person does not qualify for employment insurance (EI). Although this remains true if you have to close your business, it no longer is the case for maternity, parental, sick or passionate care leave.

In 2010 the government announced a special EI program that allows the self-employed person to “contract” with EI.  Self-employed is defined as a proprietor or a small corporation where you control at least 40 per cent of the ownership of the corporation and are not eligible for regular EI benefits.

After meeting this definition of self-employed, in order to qualify for registration your business must earn at least the threshold income as set down by EI ($6,000 in 2010). Registration can be completed on-line relatively painlessly.

EI premiums are calculated based on your self-employed income only. The initial premium is based on the registration calendar year’s entire self-employed income regardless of when registered during the year, and is payable in full by April 30.

Logically then, registration makes sense on the first of January.  However, to be eligible to receive benefits, the business has to have been registered for a full 12 months.  For example, registering June 15, 2011 makes eligibility for a claim beginning June 16, 2012, although the initial premium would have been calculated on all 2010 self-employed income. So your personal situation regarding any planned leave will dictate the best time to register.

Premiums are based on the regular EI rate and, the good news is, the self-employed person does not have to remit the “employer’s” portion of the EI premium that is legislated under the regular EI program. After the initial year, premiums are calculated and remitted throughout the year.

Once registered, participation in this special EI program is continuous regardless of change in the nature of self-employed income.

Deregistering is possible as long as you have never made a claim under this special EI program. This means once benefits have been paid under this program, you must continue to pay EI premiums as long as you have self-employed income. A fact that should not be overlooked.

For example, you may have the option to claim under this special EI program or under the regular EI program because you are also working for someone else earning T4 income. Even though the benefit may be greater under your self-employed income special EI program, it may be wiser to make the claim on your lesser T4 income under the regular EI program in order to retain the option to deregister in the future.

To qualify for a claim, the amount of time you are devoting to your business must be reduced by at least 40 per cent of your usual effort directly because of the maternity, parental, sick or passionate care leave you require. If your business continues to earn income, such as trailer commissions or profit from work done by employees, your benefit will be reduced.

To register or not to register? For a cost/benefit analysis to hold credence the more certainty of future events the better, and in most cases this is pretty difficult.

Other than, are you going to have a baby, there is little certainty in life. Is a loved one terminally ill? Are you going to get sick?  In most cases, the better way to go is by self-insuring either through planned savings or a private insurance policy.

Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca