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Mat leave for the self-employed... is it worth it?

3K views 15 replies 9 participants last post by  gordguide 
#1 ·
I'm getting way ahead of myself, since a need to take maternity leave is definitely NOT imminent, but it's in my nature to think ahead, and I am in my early 30s and female.

It seems that Harper's government now allows the self-employed to pay into EI and collect special benefits, which include maternity, parental, sickness and compassionate care leave. I was very much in favour of this move before, but in actually crunching the numbers--I have to wonder if it's really worth it at all.

Employment Insurance special benefits for self-employed people

The program is voluntary, but has a few catches.
1) You have to register for the program 1 year before you take any of the special benefits.
2) If you take any of the special benefits, you must continue to contribute to EI for the rest of your self-employed life.

Note that you only need to contribute the employee portion, not the employer portion.

Sitting down and crunching the numbers for 50 weeks of mat/parental leave (and ignoring inflation and the time-value of money for simplicity), I'd have to pay just under a maximum of $750 per year for EI for 30+ years, just to collect a maximum of just under 23,000 of EI for mat/parental leave.... assuming I do this once and for the full year.

On the other hand... 23,000 for one years' worth of taxable income is peanuts. I could instead do this the old-fashioned way and try to save up ahead of time, take some time off and then work part-time afterward.

The job security aspect of it is moot point for me. Whether I choose to pay EI or not is up to me. How much time I take off is partly up to me and up to the demands of my business.

So the question remains... is it really worthwhile to participate in this?
 
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#2 ·
I think it only makes sense if you need a loan from the future to go ahead with having a child at all. If you can swing it without entering the EI program, I would do it that way.
 
#3 ·
My husband is self employed and I have talked about this with him. He's not too enthused about this for the very same reasons you mentioned. In his case it would be 15 years of EI contributions. I'm also assuming that the contributions would be based on the previous year's taxable income and that they would be payable in full each year by a certain date. I think that this program would be beneficial for somebody with a recurring chronic illness. I would imagine that you would need a doctor's note to apply for the benefits and he would have to put a period of recovery or return to work date on it. My husband does have disability/illness insurance with lower payments and higher benefits and it has less restrictions than the EI. Sonal I hope this answers your question.
 
#4 · (Edited)
" ... I'm also assuming that the contributions would be based on the previous year's taxable income and that they would be payable in full each year by a certain date. ..."

It's based on the current year's taxable income and there's a maximum contribution limit, like CPP. You don't pay on any salary income above (2010) $43,200. That can also be expressed as a maximum contribution amount of $747.36. Note that if you somehow pay the maximum contribution amount but your salary is less than the maximum insurable income they will refund the excess contributions. The rate for 2010 is $1.73 per $100 earned up to $43,200.

You make contributions at the same time you would make your regular tax payments. Some self-employed people pay tax once a year, others pay quarterly or sooner. Whatever they let you get away with now (eg., if they want you to make income tax instalments quarterly, they'll tell you, whether you're contributing to EI or not).

I don't know if you have to enroll beforehand, but if you don't, you could conceivably make contributions on last years' income when you do your taxes this spring. Better check with them to hash out what the rules are that way.

The big question probably is "how many kids do you think you'll have (include "accidents")?" The other thing you would want to check out is what are the rules regarding running your business while on maternity leave, and do they claw back benefits if you earn above certain amount, like they do with regular benefits.
 
#5 ·
As regards the program itself, the mere fact that its very difficult for working people to figure out if it will really benefit them ... says it all, I think.

Aside to GordGuide: If you're so damn smart, why are you in Saskatoon? :)

(seriously, you continuously impress me with your intellect, writing and broad base of knowledge)
 
#7 ·
Back to the 60's

Aside to GordGuide: If you're so damn smart, why are you in Saskatoon? :)

(seriously, you continuously impress me with your intellect, writing and broad base of knowledge)
In all of the movies in the 60's and 70's, when people wanted to go somewhere idylic, they always ran away to Saskatewan. Maybe GordGuide knows something you don't ... Or maybe not :)
 
#6 ·
On a fiduciary level, this is actually fairly simple. Using the OPs soft parameters and in round numbers $750 a year for 30 years is $22500. Estimated return is $23000. One child, break even (nobody's idea of a good investment): two children, double your money (100% ROI): etc.... ;). All for slightly less than $15 a week over one's working life.

It is other factors that make this decision difficult. On any psychological rating scale for stress, birth of a child figures fairly high. It is a major life change and even positive change is stressful. Over and above the fatigue and so on reported regularly by new parents one has to consider other factors. Will the mother (in fact both parents but for simplicity I'll refer to 'mother') be physically/psychologically capable of returning to a reasonable income earning level within the first year? Birth complications/defects are statistically rare but when they occur can have a devastating effect in the first year or beyond. Birth complications have risk factors - genotype, phenotype, family history, medical history of the mother and genetic contributions of both parents, and so on - that can be taken into account when making what is essentially a bet.

Take a long hard look at the postpartum experiences of your friends, peers, family members and consider how you will measure up to whatever issues you see.

As a father of 2 children whose births involved relatively minor, in the grand scheme of potentials, complications and remembering well the condition of their mother for the first year, I'm inclined to say that $15 a week is small insurance to secure a modicum of guaranteed income for a year. As income increases, hopefully, over life the $15 becomes a smaller and smaller consideration.

Further, the newborn, even in the very best of health will benefit immensely from the presence of a loving parent full time for the first year, so that $15/wk is an investment of another non-fiduciary kind helping to provide a solid foundation that will payback throughout the child's life.

Note also that paternal benefits are now allowed - something that was not allowed in my day.
 
#9 ·
sharonmac09: Deductions depend if you're incorporated or not.

Self-employed (not incorporated) tax remittances are based upon previous year's earnings and then adjusted when you do your income tax return to reflect 'actual' versus 'anticipated'.

If you're incorporated the company deducts withholdings based upon what is actually being paid.

To get back to Sonal's original question: In my estimation most insurance schemes are based upon the premise that it's going to take in more money than it pays out. That's how they stay in business. This may not be the case with the government. But generally speaking I look at insurance as being necessary for 'things that are legislated to have insurance', and 'things that I couldn't afford to replace'. So I have house insurance (can't afford to replace), car insurance (legislated), and liability insurance for my corporation.

One year maternity leave? I can afford that fiscally, and most self-employed people have to make far more arrangements than just 'fiscal' in order to take time off. The money is the least worry. I don't consider this a 'good investment' fiscally. (As a self employed person I still managed to spend 'quality time' with my daughter when she was born, while still running my business. Self employment means you can't just walk away from the business for a year. It doesn't work that way.)

People who are less risk oriented in their business practices may consider it a 'good insurance', but probably don't have the commitment necessary to truly succeed in self-employment.

(Self employed 25 years, parent for 20)
 
#10 · (Edited)
" ... Gordguide, you are correct about the income tax installment payments. However, how do you think the payments are calculated upon? The previous year's taxable income. The EI contributions will also most likely be calculated similarly to this. ..."

Whether CCRA wants you to pay in instalments shouldn't be confused with any particular government program. It's true that they will, at some point, ask self-employed persons (or retired persons ... ie anyone who does not pay via the payroll schedule each pay period as employees do but who has taxable income) to pay in instalments based on the previous year's income, this is an administrative decision by CCRA.

I would not confuse that with a program you apparently have to enrol in, especially if it's a program like EI, where premiums are collected by CCRA but not administered or "spent" by them. They just deal with the contributions; you don't apply for EI through CCRA.

The people you need to ask about enrolling or eligibility for EI are the EI people. CCRA has nothing to do with it beyond being the agent for collection of premiums and assessing any taxable income from payment you receive via a claim.

That last line is important ... EI payments are taxable. This comes into play when you have other taxable income for the year, since EI is taxed via the tax table like any other income paid via a regular pay period (ie like you would for any employees you may have). And like any employer, the rates paid via the tax table are based solely on those payments and not with any attempt to include income from other sources.

The net result is most EI payments work out to the equivalent of a part-time job; 80 hours (payments to you are made every two weeks under an eligible claim) at a maximum of roughly $900 is essentially the same as 80 hours at minimum wage. People who are not eligible for the maximum would earn the equivalent of a minimum wage part-time job. So, you are taxed as if it's your only income and you work for minimum wage.

That means they will assume the first roughly $10K of your income is tax free, and collect at the 16% (or whatever it is now) plus your provincial rate, corresponding to the lowest bracket for the remainder, which is how the payroll tax tables approach low income earners.

Unless your claim runs January to December, you will presumably have other income, presumably at a higher tax bracket, to deal with at tax time. That means the tax deducted from EI payments won't be enough to cover the tax due come tax-year-end. Anyone contemplating the program should be consulting with their tax planner about the best time to start a claim, and the good news is you have some leeway in deciding this for yourself, as compared to someone who is laid off.

People whose self-employed business employ their spouses should also look into the rules regarding whether they both are eligible for enrolment. This can be a somewhat tricky area so again, consult with a tax professional as you would any business decision that has tax implications.

It's very important to not confuse CCRA and EI. They are arms-lenght departments of the Federal Government. EI has much more arcane rules and EI is used as a form of pubic policy by the government. Roughly 80% of all EI claims are paid to people other than those who have lost their jobs; maternity leave is the biggest by percentage followed by training. The unemployed get what is left over.

Because of that public policy role, EI rules change often, pretty much every year and sometimes more often than that. CCRA and the Tax Act is a beacon of stability and consistency by comparison, believe it or not.

It would be a mistake to start planning this based on the assumption the self-employed maternity leave EI program will remain unchanged over your working life. The chances of that happening with EI is virtually zero. You can take some comfort, however, in looking at that policy role for what it is.

Maternity leave is not going away because it is a very popular program with both voters and any governing party's stated goals of helping working families, not to mention that it's a simple means governing parties use to help families without "raising taxes" ... premium changes fly somewhat under the radar, yet the applause is just as loud.

The unemployed are viewed by the public as parasites, to some degree or another. So, policy changes could be expected to cater to the former moreso than the latter, which is some comfort with future planning and your decision to enrol or not to enrol.

Finally, it may be wise to remember that the Maternity Leave program allows for each parent to take that leave. If both are eligible, taken as a family, it amounts to close to two years, each taking a turn.

In any case, the decision almost certainly should be made in consultation with your accountant, by asking questions and getting further information from the EI people themselves, and between spouses. Some of the things I mentioned are things EI won't tell you, but as to the mechanics of the program, do not take anything I or anyone else say here as Gospel ... do your own due diligence. CCRA has the least to do with the whole question; they are just the bean counters after the fact.
 
#13 ·
I am incorporated... makes for easy numbers, plus it gives me a few more options in terms of being able to earn income and leave in the company without drawing a salary, or to take some out via other means--but that gets into the realm of fancy accounting.

Still, as MLeh points out, the other business factors are probably a much bigger issue.

It's really not a question I need to answer right now. If this is a route that makes sense for me, I can opt-in later so long as it's 1 year in advance, but it did get me thinking if there is much point in participating at all. The rough numbers--with a lot of assumptions--make some sense for a minimum of a full year of mat leave, but practically speaking it's not that much money. (I'm not taking anyone else's income into consideration at this point.) But I'd more than likely need to draw on some additional money from somewhere, plus I'd more than likely have to continue to be involved in the business anyway.... doesn't seem to be a lot of point.

Almost makes me want to go out and get a job for a year.... ;)
 
#16 ·
" ... What I wonder is how gordguide has not figured out how to use the quote button yet!!? ..."

I know how to use the quote button. However, it's not proper form to quote without quotation marks, and legally, you break copyright law when you fail to do so.

If BBEdit code placed quotation marks when it marked up via the quote code, I'd use it.
 
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