EI for the self-employed
Should you opt in or stay out? Experts say 'do the math'
By Tom McFeat, CBC News
Posted: Sep 30, 2011 11:55 AM ET
Last Updated: Mar 1, 2012 8:58 AM ET
Ever since the federal Employment Insurance program began in 1940 (then known as Unemployment Insurance), it has specifically excluded one very large group — the self-employed entrepreneur.
They haven't needed to pay EI premiums. But the self-employed also couldn't get any benefits when they found themselves unable to work.
That has now changed. Since the start of 2011, small business owners and other self-employed workers have been allowed to access select parts of the EI program — the "special benefits." These include maternity and parental benefits, sickness allowance and compassionate-care payments.
Now, the more than 2.6 million Canadians who are self-employed — small business owners, real estate agents, lawyers and farmers, among others — can choose to become part of the safety net that millions of Canadian workers have counted on for 70 years.
But there are lots of conditions to satisfy before any EI payments can be made, and the program isn't for everyone. The figures show that, so far, the program hasn't attracted the interest of the vast majority of the country's self-employed. Since the expanded EI program first became available at the beginning of the year, just 11,127 have opted in and 1,810 have started drawing benefits.
Experts say people should carefully check out the pros and cons before signing up because it just doesn't make financial sense for many entrepreneurs to join the EI club. (In Quebec, for example, the self-employed are already covered for maternity and parental benefits.)
First, here's a look at the kinds of special benefits that now are available to self-employed Canadians who opt in:
- Maternity benefits — up to 15 weeks for birth mothers.
- Parental — up to 35 weeks for biological or adoptive parents.
- Sickness — up to 15 weeks for people who can't work because of sickness or injury.
- Compassionate care — up to six weeks for people who can't work because they need to care for a severely ill family member.
Now, the costs. Once self-employed people decide to opt in, they begin paying EI premiums at the same rate as employees do: $1.78 per $100 of insurable earnings to a maximum $44,200 of insurable earnings (2011 rates).
That works out to a maximum annual premium of $786.76. Since the self-employed won't have access to regular EI benefits for periods of unemployment, they won't need to pay the employer portion of EI premiums.
The benefit is equal to 55 per cent of one's average weekly earnings from self-employment in the calendar year before the claim is submitted. The maximum weekly benefit in 2011 is $468.
Do the math
From here, it's easy to figure out whether it's worth your while to opt in.
Let's take the case of a 30-year-old self-employed designer, Jill, who made $50,000 last year. She's thinking of having a child and wants to take a full year off to look after her newborn.
If she had opted in and paid EI premiums for at least one year prior to applying for benefits, she could collect up to 50 weeks of benefits (15 weeks of maternity benefits and 35 weeks of parental benefits). She could collect a maximum $468 a week for all 50 weeks, giving her a total of $23,400.
Her EI premiums are $786.76 a year (2011 rates). At current EI rates, she would need to contribute for 29.74 years before she started paying more in premiums than she received from the program (assuming EI premiums and maximum benefits rise at the same rate).
That's for just one child. If she had two children and took two 50-week leaves, she could be in line for up to $46,800 in benefits. If she paid the maximum for 30 years, she'd have paid only $23,602.80 in premiums, so opting in could really make sense for Jill.
But the calculation becomes a little murkier if Jill doesn't want to take the full 50 weeks of maternity and parental benefits.
What if she just wants to take just 15 weeks away from her business? She pays the same $786.76 in annual premiums, but will collect just $7,020 in benefits. That's equivalent to a little less than nine years of premiums at 2011 rates.
No opt-out after a claim
No problem, you say. Jill should just opt out of the program after she's made a claim.
But that's when Jill would find out about the biggest catch of the EI-for-the-self-employed program. Once you've made a claim — any claim — you must pay EI premiums for as long as you're self-employed. You can't opt out.
That's why advisers are recommending that people weigh the pros and cons carefully before deciding whether to opt in.
That's not the only reason to hesitate before making the plunge. Any income made while collecting special EI benefits must be reported and will end up reducing those benefits — often on a dollar-for-dollar basis.
If you have the type of business that generates passive income whether you're working on it or not, you won't want to opt in.
"I have yet to see a situation where it makes sense financially for someone to opt into the program, although I do discuss the program with my self-employed clients," says Angus Shuttleworth, a chartered accountant in Burlington, Ont., who specializes in the small business sector.
Shuttleworth notes that it's difficult for many owners of small businesses to step away from their business. Combine that reality with the requirement that once you take benefits, you are required to continue paying into the program for as long as you are self-employed, and he says the math won't add up for most people.
Still, Shuttleworth acknowledges that it may make sense for some to opt in. He asks his clients the following questions to assess whether they might be good candidates to sign up:
- Do you have children? Do you plan to have any? If so, how many?
- What is the likelihood of you claiming sick leave? (Shuttleworth notes that no medical examination is required for EI benefits for the self-employed, so the program "may be beneficial for the business owner as a way to enhance or supplement short-term disability benefits.")
- Do you have members of your family who may require your care in the future?
- How seasonal is your business? (People in seasonal businesses, such as roofing and landscaping, may have periods of little or no income so benefits paid during those periods wouldn't be reduced. "However, it is difficult to time sicknesses or births to coincide with seasonal lulls in one's business," Shuttleworth points out.)
You also have to figure out if your business is really the type that you can leave for months at a time.
An e-mail to CBCNews.ca from commenter "ShootFromThe Hip" shortly after the EI reforms were announced addressed that point directly: "I don't know about you guys, but if I take parental leave, who'll run the company? I'm not a big business with infrastructure in place to keep my clients happy."
That's not the only catch. As noted earlier, you must also have paid premiums for a full year before drawing any benefits.
So, deciding to opt in when you're three months pregnant won't work. You have to opt in when you're thinking of starting a family.
You also must have reported a minimum of $6,000 in self-employed income in the calendar year before the year in which the claim is made.
And if your business folds and you find yourself out of work, no benefits will be paid. This isn't like regular Employment Insurance.
Add up all the costs, benefits and drawbacks and you can see why many experts aren't surprised that fewer than one half of one per cent of Canada's 2.6 million self-employed have chosen to opt in to the EI system.
For many of those who have decided to join the club, the math may have made sense for them.
Others may have joined simply because they want another income option if their career is temporarily interrupted.
Call it a security blanket … albeit one with costs, catches, and conditions.
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