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Employee or Self-Employed Contractor?

As a business owner, there will inevitably come a time when your company grows to the point where you need help. But is it better to hire an employee or contractor?


What’s the difference between the two?


The first main difference is that a contractor is considered to be self-employed. This means that you simply pay them their fee and do not need to deduct or pay employment taxes. That doesn’t mean a contractor doesn’t have to pay taxes, it just means they have to claim their income and file the taxes themselves. In Canada, they will also have to charge you GST and possibly PST depending on the work being done.


Now before you get excited thinking you can avoid the paperwork of payroll, you need to understand that you and your worker can’t just agree to call them a contractor and be done with it. It is the nature of the working relationship that decides whether it is employer-employee or business–business.



Factors to consider


When determining if your working relationship will be considered employer-employee or a business relationship (service contract) the Canada Revenue Agency considers how each party defined their working relationship before entering into the arrangement. Then they will look at the following factors and decide if the chosen definition is reflected in the facts.


Control

Do you tell the worker when and where they will work and what will be done? Then you've got an employee. If you allow the worker to set their schedule and decide where and how they work the CRA will investigate who has the right to control the work.

For example, if you give someone a job and they refuse to do it, so you don’t give them any more work the CRA would probably consider this an employee relationship. But if you say “Hey, I’ve got this job for you” and your contractor says, “No thanks!” and you still give them work the next time, that’s a business-to-business relationship.


Ownership

If you own the tools and pay for the supplies that the worker uses, that’s typically an employee relationship. Someone that is an independent contractor working for themselves would not usually rely on their customer to provide them with the tools they need to get their job done.


Risk/Chance for profit

When the worker runs the risk of incurring a loss or has a chance of making a profit from the job, that’s more indicative of a contractor relationship. The higher the financial risks the worker faces, the more likely they would be considered a self-employed contractor.


Will you require them to work exclusively for you?

If the worker is free to find work for multiple companies within the same industry, that’s more likely to be considered a business-business relationship. But, even if the worker is free to work for competitors, if they receive the majority of their income from your business, the CRA could decide that the worker is dependent on you and consider them an employee.


Subcontracting or hiring assistants

Employees are required to do the work themselves. In a business-business relationship, the contractor is free to pay someone else to assist them or do the work for them.

A visual graphic showing the pros and cons of hiring an employee or outsourcing a contractor.

If you are ever unsure of how the CRA would classify your worker's (or your own) employment status, you can ask the CRA for a ruling. It will let you know if the relationship is employment and whether income is pensionable or insurable. You just need to log into your CRA account and select "Request a CPP/EI ruling"



A screen shot of the CRA website showing how to request a ruling for employment relationship status.

If you have more questions, or need assistance navigating this decision, please Reach out!

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