The question of whether to position yourself as an employee or an independent contractor comes up on a weekly basis at our Small Business Centre as clients try to determine their status or the status of those they are looking to hire on a part-time basis.
From the payers’ standpoint, the advantages of hiring an independent contractor are significant and include:
- No reporting or filings with the Canada Revenue Agency (CRA).
- No forms or filings for terminations.
- No obligation to deduct Employment Insurance (EI) and add employer portion.
- No obligation to include worker in benefits package or severance package.
Advantages for the independent contractor include:
- Receiving larger paychecks as there are no deductions for Income Tax, EI or Canada Pension Plan (CPP)
- May claim certain expenses incurred in running the business.
Disadvantages for the worker are that they cannot apply for employment or disability insurance and may not be able to apply for workers’ compensation.
Although there are clear advantages to hiring or becoming an independent contractor, it is important to understand that according to Revenue Canada there are several factors that may indicate that you or your worker is an employee and cannot be classified as self employed. A business that has hired a contractor when they should have hired an employee, and has failed to deduct the required CPP contributions and EI premiums, must pay both the employee and employer’s share and any contributions and premiums owing, plus penalties and interest.
To help determine status the CRA has a developed guide RC4110 that sets out factors to consider including:
- Control – Does the company tell the worker what to do, when to work and how many hours he or she will work?
- Tools and Equipment – Do the workers use their own tools, equipment, computer or desk or does the payer supply these?
- Ability to hire help – Can the worker employ others to complete the job?
- Financial Risk – Is there a degree of financial risk and ability to generate a profit/loss.
Determining status as employee or self employed can be confusing. If you’ve read the guide and you still aren’t sure, you can request an official ruling from Revenue Canada. See guide RC 4110 for the steps involved in requesting a ruling.
And don’t forget, the Halton Region Small Business Centre is here to help you. If you have any questions, please call us at 1-866-442-5866, www.haltonsmallbusiness.ca, email@example.com or visit us at 1151 Bronte Road, Oakville. You can also follow us on Twitter @haltonecdev and Facebook at www.facebook.com/HaltonSBEC.