When you're running a business and find that the pace of work is exceeding your capacity and you need additional help, you face a crucial decision:
Should you hire an employee or subcontract the work to an independent contractor?
This choice has important implications for your business, especially when it comes to… you guessed it: taxes.
Hiring an Employee
Hiring an employee means bringing someone onboard to work for your company. As their employer, you have significant control over their work, including setting their hours, providing tools and equipment, and directing how tasks are completed. Employees typically receive benefits like paid vacations, health insurance, and pension plans.
We also want to add a note here that you can hire employees no matter what illegal structure of your business is. We often hear the misconception that a business has to be incorporated in order to have employees. Not true!
Subcontracting to an Independent Contractor
On the other hand, subcontracting involves hiring an independent contractor or freelancer to perform specific tasks or projects. Independent contractors are self-employed individuals who generally have more control over their work methods and schedules. They use their tools and equipment and often work for multiple clients simultaneously.
Why It Matters for the CRA
The CRA cares about how you classify your workers because it affects tax obligations. The key difference boils down to deductions and contributions such as income tax, CPP and EI. Employees are also required to get certain benefits that subcontractors just are not such as vacation pay, public holiday pay and legal rights around hours of work and termination.
The CRA uses various criteria to determine whether a worker is an employee or subcontractor including but not limited to the following:
Control: The degree to which the payer (employer) can direct and control the worker's activities and work outcomes.
Tools and Equipment: Whether the worker provides their tools and equipment for the job or relies on the payer's resources.
Financial Risk: The extent to which the worker bears financial responsibility for their work, such as investing in equipment or assuming liability for errors.
Opportunity for Profit: Whether the worker has an opportunity to profit from their work or may incur losses.
Intention of the Parties: The understanding and intentions of both the payer and the worker as documented in any written contracts or agreements.
Exclusivity: Whether the worker can work for other clients or is exclusive to the payer.
You can find more guidance from the CRA HERE.
Determining the classification of a worker as an employee or subcontractor can be subjective as it involves a nuanced evaluation of various factors, and there isn't always a clear-cut answer. The interpretation of these factors can vary, making it essential to consider the specific context of each working relationship to arrive at the correct classification.
It's essential to classify workers correctly to avoid penalties and ensure compliance with tax laws. Misclassifying an employee as a subcontractor can result in back taxes, interest, and fines.
When you're in a hurry to hire help, remember how crucial it is to correctly decide if someone is an employee or a subcontractor. Getting it wrong can cause legal and money problems later on, so take your time to decide or ask a pro for help if you're not sure.
Our 50-minute Clarity Call are designed to answer your hearty questions such as choosing between hiring employees or subcontractors while considering the financial implications for your business.
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Wishing you success in your business,
- Martina + Ashli
Date published: September 15, 2023
Disclaimer - The information provided in this blog is general in nature and solely for educational purposes. Readers use and implementation of the information comes at their own risk and is their own responsibility.