Consider the Benefits of EI for the Self-Employed

If you’re self-employed, you benefit from several tax advantages, but suffer from one big drawback: You’re not eligible for regular Employment Insurance (EI).

You can, however, voluntarily contribute to become eligible for EI special benefits, which cover 55% of your average weekly earnings for:

• Maternity (as long as 15 weeks);
• Parental Leave (as many as 35 weeks for either parent, or shared between spouses or common-law partners, to care for their new child);
• Sickness or Injury (15 weeks); and
• Compassionate Care (as long as six weeks to care for a dying family member).
• Parents of critically ill children benefits are for parents who must be away from work to care for or support their critically ill or injured child. Either parent can receive benefits or they can share benefits between them (up to 35 weeks).

Any Canadian who runs an unincorporated business or is a shareholder of a private corporation may opt in. After paying premiums for 12 months, you will be eligible to receive the special benefits. The premiums match those paid by regularly employed individuals. You pay a set percentage of your net business income (owners of unincorporated companies) or of your wages (shareholders in private corporations). The percentage is set annually by the federal government.

You pay the premium as part of your income tax return at the end of the year. It’s worth noting that as a regular employee, not only would you have to pay your premium (deducted from your paycheque) but your employer also has to pay a larger portion for you. As a self-employed person, you only need to pay your own portion to access the special benefits.

Another important distinction for shareholders is that the premiums and benefits are based only on the uninsurable wages taken from your company. Dividends you take are not taken into account.

This program can be very attractive to people in certain life positions. For example, a self-employed woman in her 30s with income of $30,000 a year will;

• Pay $549 in special EI premiums each year to potentially access $317 a week in EI special benefits; and
• Receive $15,850 if she has a baby and takes a total of 50 weeks for maternity and parental leave.

Assuming her income and the EI rates remained the same, she could contribute for almost 30 years, and still be ahead.

There are downsides to the program. For instance, if you change your mind after enrolling you still must pay a full year of premiums unless you withdraw right away. An even larger downside is that if you enroll and at some point take benefits, you must remain in the program for the remainder of your self-employed career.

An example: A 25-year-old man registers while he is a self-employed painter and takes compassionate care benefits when his parents become gravely ill. Eventually his parents, die, he gets an inheritance and stops painting to attend dentistry school. When he graduates, he starts his own company and takes wages. He has no choice but to pay EI premiums on those wages and he still will qualify only for the special benefits, not regular benefits.

Individuals who work for an employer are eligible for those regular benefits, which they receive if they lose their jobs through no fault of their own, such as a shortage of work or layoffs, and are available and able to work but cannot find a job. Regular benefits also generally pay out 55% of average weekly wages and last anywhere from 14 to 50 weeks, depending on:

• The unemployment rate in the region where the person lives; and
• The number of hours of insurable employment that the person accumulates during the 52 weeks before the start date of the claim.

Full-time employees also are eligible for the maternity, parental leave, sickness, compassionate care benefits and parents of critically ill children benefits.

Enrolling in this optional EI program is an important choice for every self-employed person. For many, the thought of deliberately paying more to the government seems preposterous, but there are those for whom this system could really be helpful when they need a financial safety net.

If you think this might be a valid option for you, speak to your financial adviser or accountant for a second perspective on your situation before you take the plunge.