You often need help when running your own business. This can mean bringing in people to help. But, be sure to know the difference between hiring employees and contractors. Being an employer has tax implications.
First, am I an employer?
Being an employer means you have tax and entitlement responsibilities that you must meet. For employees, you must:
- Deduct Canada Pension Plan contributions
- Deduct employment insurance benefits
- Calculate and deduct income tax from remunerations
- Remit these deductions to the CRA accordingly.
As an employer, you can face severe consequences if you don't do this. Paying both the employer's share and the employee's share of these contributions is one of the many responsibilities when hiring employees. Otherwise, you may also have to pay penalties and interest. You don't have to consider these for self-employed workers you hire. Yet, some self-employed workers are eligible for employment insurance.
Second, what's the difference between an employee and independent contractor?
The CRA says you should consider the following factors to determine the employment status of a worker:
- Control: What degree of control do you have over the worker? This includes the payer's influence over the worker and control over their daily schedule and activities.
- Opportunity for profit: Can the worker realize a profit or loss from these activities? Employees typically don't have this. Generally, an employee's wages will vastly outweigh expenses such as transportation.
- Equipment and tools: Does the payer provide the tools needed to complete the work?
- Financial risk: Similar to the bullet above, you must consider the financial risk taken by the worker. Not all work-related expenses are reimbursable by the employer.
- Subcontracting work: Can the worker subcontract the work if they wish? Employees typically can't do this.
- Investment and management: Does the worker have to make investments to provide the service? The self-employed often must make business decisions that could impact their ability to make a profit from the service.
Signs the worker is an employee
Let's use the above criteria for signs that your worker is an employee:
- Control: The worker is subordinate to the payer. Essentially, the payer determines work parameters for work completion.
- Opportunity for profit: Employees typically don't have the opportunity for a loss or profit. Even if they're commission-based or drive their own car without a mileage allowance, the chances for a loss are low.
- Equipment and tools: Employees typically get their tools from the employer. If something breaks, the payer replaces the tool.
- Financial risk: An employee has a very low financial risk for the work. The work is continuous and the worker isn't responsible for operating expense.
- Subcontracting work: Employees can't use a subcontractor to do their work. The responsibility of completing work task lies with the employee.
- Investment and management: An employee often has no capital investment in the business paying them.
The wigns the worker is self-employed?
Common signals of a self-employed worker are as follows. Keep in mind, there could be exceptions.
- Control: A self-employed worker operates independently of the payer. They can work when and where they'd like without oversight. The self-employed can also refuse work if they prefer.
- Opportunity for profit: A self-employed person goes to work with the ability to make a loss. For example, a freelance contractor could be hired to build a shelving unit. During that work, he may have to buy expensive new tools to replace ones that break during the course of the work. This ultimately leads to a loss for the job of the shelving unit.
- Equipment and tools: A self-employed worker uses their own equipment and tools to complete a job.
- Financial risk: The self-employed often face financial risk. This comes from not having continuous work or having to pay for operating expenses of their business regardless of how much revenue is coming in.
- Subcontracting work: Unlike an employee, the self-employed can subcontract work out or hire assistants.
- Investment and management: The self-employed have capital investment in the business and are often running it.
Are your workers employees or self-employed?
Use the factors listed above to determine if workers are employees or self-employed. It's important to note that each individual factor isn't definitive. For example, mechanics can still be considered full-time employees even when providing their own tools.
What if I'm unsure if they're an employee or self-employed?
If the status of an employee or self-employed person comes into question, you can always request a ruling. You can do this via the "Request a CPP/EI ruling" in your CRA My Business Account. Alternatively, workers also have the option of initiating these rulings.