Are you at the point in your business where you need to start looking at adding to your team? Hiring the right people can be foundational to your success. Many small business owners struggle with whether to hire a contractor or a full-time (or even part-time) employee.

You don’t always have the choice to hire a contractor over an employee.  Of course, the government wants to encourage as many of us to hire employees – who are paying taxes off each cheque, who are easier for the CRA to track and who are more easily guided by the ESA rules protecting employees, but unless the staff member qualifies as a contractor, the choice is out of your hands.

If you are working with a contractor regularly, I often suggest to clients that we call the CRA and confirm based on their findings that we are in fact allowed to do so.  This way, we avoid any big surprises down the road of paying the source deductions on any wages paid out.  Rulings can be initiated in your CRA My Business Account – all the steps are very clearly laid out.

Let’s a look at the differences!

A CONTRACTOR

A contractor is a person or company that works on a contractual basis. They have the nature of not working regularly for a single employer.

Instead, they work with different clients based on a request, hence, they’re considered to be freelancers who negotiate deals on specific projects with different clients or employers.

Expenses are deductible.  Contractors can deduct eligible expenses from their income. They are responsible for their insurances and business’ pension. They must pay their Canada pension plan and income taxes on their own.

Personal tools and equipment.  Most companies will consider fortified contractors who can carry out contracts with their own tools and equipment.

Contractors are experts in their fields.  A contractor is often an expert in their field.  They will likely require less training to do a particular job.

No limitations to work.  Employing a contractor allows a company the flexibility to handle the challenges of business, while costs of labor and cash flows are managed efficiently. Contractors have little or no consequences for taking up more than one job and can have more clients.

Absence of Employment Standards Act (ESA).  The Employment Standards Act (ESA) doesn’t apply to a contractor. Instead, it’s an organization that strictly guides a company with regards to employers and employees dealing in businesses recognized under the Employment Act. 

Remitted taxes and invoiced work.  When a contractor completes a contract, they invoice it to the business. It is the responsibility of the contractor to remit taxes, whether GST/HST, Income taxes and CPP.  The status of a contractor disqualifies them from being eligible from collecting Employment Insurance, which means they also don’t pay into it.

Works for a short period.  A contractor has only a specific period to work for an employer, after which he ceases to be connected to the company.

AN EMPLOYEE

An employee is hired to do a particular job wherein payment is given in exchange for labor. They work for a company, organization, or even a community.

An employee is accountable to an employer; therefore, they have no independence of work like the contractor does.

Company tools and equipment.  The employee is provided with the tools and equipment needed to carry out the job by their employer. Contractors typically have to pay out of pocket for such equipment.

Salary and wages.  Employees have fixed salaries and wages which are generally consistent, reliable, and cannot be amended easily.

Constrained Performance.  The job of an employee is restricted to what is assigned to them by the employer. Nothing more than that is expected. The employee isn’t licensed to employ someone on the job other than himself to perform duties.

Deduction of taxes.  Payroll taxes are deducted from an employee’s paycheque.  These taxes include income tax, employment insurance and Canada pension plan.

Employment Standards Act (ESA) Benefits.  The ESA is beneficial to employees, thereby making them entitled to laws such as minimum wages, severance wages, and other statutory benefits under the ESA.

Many companies looking to expand their team for the first time, prefer to start off with a contractor.  It’s easy to receive an invoice, pay and move on.  There is no fuss in determining specific guidelines for employment, opening a payroll account, figuring out taxes and pay periods etc..  However, please make sure that the person you chose in fact qualifies as a contractor with the CRA, it’ll avoid a big bill later if they determine otherwise!