The Difference Between Employees and Independent Contractors

CPA, CRA, employee, independent contractor

What is the Difference Between an Employee and a Contractor?

If you’re a business looking to hire someone to complete a project, will you be hiring an employee or an independent contractor? At first, it seems like there is an obvious difference between these two roles. However, there are more similarities than you might think. In fact, some businesses who want to hire a contractor end up inadvertently bringing on someone as an employee instead. This matters because there are various different legal and tax implications that apply when someone is hired as an employee.

Working with contractors rather than hiring employees can have many benefits for a business. Businesses don’t have to provide benefits, pay pension contributions, or offer paid training to contractors. Plus, working with a contractor gives a business a lot more freedom and flexibility.

However, if a business that believed it was working with a contractor is later deemed to have actually hired an employee (such as during a Canada Revenue Agency audit) this can lead to a big hassle and significant expenses for both the business and the individual.

What is an Independent Contractor?

An independent contractor is a person or business that provides goods or services to another entity based on the terms of a contract or verbal agreement.

Generally speaking, an independent contractor:

  • is responsible for some or all of the tools required to do the job
  • is in business for themselves and can make a profit or loss based on their work
  • is able to determine how and where their work is completed
  • is able to subcontract some work
  • can have their contract ended, but cannot be disciplined by the entity that has hired them

What is an Employee?

An employee works for an organization or individual on a full-time or part-time basis under a contract of employment.

In general, an employee:

  • is provided with tools, equipment, and materials to complete their work by their employer
  • gets paid based on an agreement and this pay is not necessarily affected by the way the work is performed
  • is told by their employer what work to complete, how much they will be paid, when the work needs to be completed, and how and where the work will be done
  • cannot subcontract work out to another party
  • can be suspended, dismissed, or disciplined by their employer

Determining if Someone is an Employee or Independent Contractor

It can sometimes be tough to know for certain if someone is an employee or an independent contractor. A person can legally be considered an employee even if they do not have deductions taken from their pay, if they charge sales tax on their work, if they submit invoices, or if they were initially hired to work as a contractor.

There are four basic points that differentiate between employees and contractors. These points are:

  • Control
    • With a contractor, the individual decides the rate paid for their work, when and how the work will be completed, and the manner in which the work is done. With an employee, the business determines these aspects.
  • Tools
    • Generally speaking, when an individual purchases their own tools to complete their work, and when they are responsible for maintenance of these tools, they are a contractor.
  • Financial Involvement
    • Contractors generally have some degree of financial risk. They can make a profit from their work or lose money due to bad debts or material costs. Employees typically cannot lose money by doing their jobs.
  • Integration
    • Typically, an employee is more integrated into a business than a contractor.

As you can see, there can be some situations where it’s tough to determine if someone is working as a contractor or an employee. For instance, consider an individual who comes into an office every day from 9-to-5, is paid an hourly rate, but who uses their own laptop to complete their work. Is this person a contractor or an employee? The specifics of the relationship between the individual and the company will matter when determining the person’s status.

If you are unsure as to whether someone your business is working with is considered an employee or an independent contractor, it’s important to find out right away. If you are having tax issues or if the Canada Revenue Agency (CRA) is disputing your claims that an individual is a contractor, contact a member of our team today. We can work with the CRA on your behalf to resolve your issues.

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