As a business owner, you have loads of things you need to figure out when it comes to finances and taxes. Now, one of the key ones is looking at what you can do to hire the right people to help your company grow and improve. And one of the biggest factors to bear in mind when trying to achieve this is understanding the difference between employees and contractors, and how this affects you as a business.

What you need to know

Since the pandemic has hit more and more people have had to rethink their career options, and this has led to a glut of people turning to freelancing. Companies are also looking to hire self-employed contractors, but it’s tough to know whether they are really self-employed, and this can impact your business negatively. So, it’s important to look at what constitutes a contractor vs what constitutes an employee, in Canadian law.

Employee

Essentially in an employer-employee relationship the worker is considered to be an employee hired by the company. Canadian Pension Plan (CPP) contributions, income tax, and EI premiums all need to be considered when you are hiring an employee. Employees have a permanent and long-term commitment to the company, and they must receive, complete, and be paid for work on a regular basis.

Contractor

So, as a business, how do you make the decision to set someone up as a contractor as opposed to an employee? Self-employed contractors are an attractive choice for employers because they don’t need to be paid pensions or benefits packages. It also means not having to pay income tax or employment insurance. So, these are some of the pointers you need to look for when trying to determine if some is a contractor:

  • Financial risk – contractors might make a loss with the work they do
  • Subcontracting – an employee cannot subcontract tasks or hire assistants
  • Control – if the worker has control of how and when the work is done they are most likely a contractor
  • Owning tools – typically contractors will own the tools in order to complete a task and get it done
  • Operating a business – a contractor will operate a business or engage in a business relationship with the employer

Consequences

If you hire a contractor who actually turns out to be classed as an employee you are leaving your business open to problems. Your business will have to remit unpaid taxes, as well as paying EI and CPP premiums. You will most likely have to pay deductions and payroll taxes retroactively, and this can cause massive financial hardship to the business. Not to mention the fact that you may well incur fines and penalties as well!

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