If you’re the owner of a small business going through a growth spurt then you might have considered bringing independent contractors on board to take care of some of the overflow business that your core team cannot handle. Independent contractors are a great option for dealing with a short-term surge in your businesses activity, but at what point do they become employees in the eyes of the CRA? We’ll explore the CRA’s definition of an independent contractor and an employee and provide some practical advice on how to make sure you’ve got the appropriate arrangement.
The Only Opinion That Matters is the CRA’s
The first thing to understand is that it doesn’t really matter what your opinion is on this matter, only the CRA’s counts. We have encountered a number of small business owners who are paying an employee as if they're an independent contractor because they have agreed to such an arrangement with the worker. The problem is it doesn’t matter what you and your employee have agreed – the CRA have their definition of what an employee and an independent contractor is and that’s all that matters.
The Difference Between an Employee and a Contractor
This topic is discussed at length in the CRA’s publication RC4110 – Employee or Self-Employed? This document explains that an employer is legally required to deduct Canada Pension Plan (CPP), Employment Insurance (EI) and personal income tax from an employee’s salary and remit them to the government. If the worker is self-employed or an independent contractor then they are deemed to be part of a separate business and the employer only needs to pay that business (regardless of what type of business structure it is) for the agreed upon price for the services provided.
There are a number of factors that the CRA uses to determine whether a worker is an employee or a contractor, but here are the three most common:
Control – this is the ability, authority, or right of a payer to exercise control over a worker concerning the manner in which the work is done and what work will be done. If the worker is closely managed by someone within your business and that person tells the worker what to do, when to do it and how to do it, this indicates the worker is an employee and not a contractor. Also, if the worker requires permission from the employer to work for other businesses then this is a sure sign the worker is an employee.
Tools and Equipment – these are the tools and equipment the worker needs to do the work. Having the worker provide their own tools does not necessarily mean they are a contractor – in some trades like plumbers or auto mechanics workers often supply their own tools even if they are employees. If the employer provides and maintains the tools and equipment the worker needs to do the work then the worker is likely an employee.
Subcontracting Work or Hiring Assistants – in some cases the worker may require assistance to do the work. If the employer arranges and pays for and subcontractors or assistants then the worker is likely an employee. If the worker does not have to do the work personally but can have someone else do the work and directly pays that third-party other party then the worker is likely a contractor.
Why Employees Want to be Paid as Independent Contractors
There are tax benefits for a worker to be paid as an independent contractor instead of an employee. If the worker is an independent contractor, they might try to write off some of their personal expenses such as gas, vehicle insurance and maintenance, part of their home expenses and meals as business expenses. By reducing their income by these expenses – which they would normally have to pay out of their after-tax income – they are reducing their taxable income and paying less tax. There are also tax savings to be had by paying less CPP and EI.
The CRA are often unforgiving in employees who are paid as general contractors because in essence it is tax evasion. As is usually the case with managing the finances of your business and especially when it relates to the CRA, you should honestly pay employees as employees and contractors as contractors and not be tempted to blur these lines for financial gain.
While the definition of whether a worker is an employee or an independent contractor can often be debated depending on the working situation, the CRA has clear guidelines for how to make this determination. These guidelines should be followed because incorrectly paying an employee as a contractor could incur significant penalties and interest payments by the business.
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Have Your Say
If you are dealing with how to differentiate an employee from an independent contractor, we’d love to hear your thoughts. Tell us what’s on your mind and share your thoughts! Also, please share this article using the social media share buttons – chances are there are others out there dealing with the same issues!