employee or contractor

Employee or Contractor: what’s best for your business?

As a business owner in Canada, if you are looking to expand your company you are probably looking at bringing in some help. You will need to make the decision as to whether it makes more sense for your company to hire a contractor or employee to help you run and expand your business. 

It is up to you as a business owner and as an employer to determine which works better for you and your company. Here are a few factors to consider when you are making this decision.


Benefits to hiring an employee

If you anticipate needing a worker for a longer term, it may be better for your business to hire an employee. Not only are employees typically with a company for a long-term commitment, but they will help you with growing your business since this is their employment. 

A contractor may not always be available to you, and they are typically more interested in growing their own business than yours. In other words, employees have a greater level of long-term commitment, and are motivated to perform for their own employment—contractors are not.

With an employee, as they improve their skillset and knowledge of how your business operates, they will assist your business in running more efficiently and make your business more productive. If you were to hire a contractor, they would simply fill a role for a period of time and when they leave, they take their knowledge with them.

If you need work to be completed a certain way, you will have greater control by hiring and training an employee. They will then understand the requirements of their role, and long term they should require less supervision or direct guidance from you. A contractor may simply choose to keep doing the tasks assigned to them the way they’ve always done it, which may not be your way or productive for your company.

If you treat your employees well, not only are they typically more productive, they tend to stay longer than a contractor would. A contractor is typically around only when you need them, and you likely aren’t their only customer.

Benefits to hiring a contractor

Hiring a contractor may end up saving you money if you only need them for a short period of time. Not only are you not paying a salary long-term, but you will also save money by not having to pay Canada Pension Plan (CPP), Employment Insurance (EI), increased wages for overtime, vacation pay, their WCB costs or even possible severance pay. You simply pay their rate and receive the work.

As well as saving you money, there will be less administrative work, since you don’t have to deal with monthly payroll and the deductions required. In addition to not worrying about submitting these payroll deductions every month, you don’t have to prepare T4s at tax time. 

Hiring a contractor may be more flexible for what your business needs. You can hire a contractor for a specific task and a specific timeframe. If your business is going through a slower time, you don’t have to worry about the salary that an employee would require. On top of that, contractors are typically more specialized and knowledgeable in their area of work, where an employee may simply have general knowledge of what is required.

Employee vs. Contractor Differences

To break this down even further, let’s look at what these differences mean to you as an owner. These differences will fall under key accounting topics that you—as a business owner—need to know. 

Payroll remittance

As an employer, you are required to withhold and remit payroll tax deductions to the receiver general for an employee. If you hire a contractor, they are responsible for their own tax payments.

Canada Pension Plan (CPP)

As an employer, you are responsible to deduct CPP from every pay cheque. This includes the portion that the employee pays as well as the equal amount that the employer is expected to contribute. Even though this allows the employee to collect more from the Canada pension plan when they retire, this is an added cost to you as an employer. 

With a contractor, you do not withhold any money for CPP. A contractor’s pension contribution is their own responsibility. Simply put, it means less cost for the business using a contractor. 

Employment insurance

As with CPP, both the employee as well as the employer pay into employment insurance through deductions during payroll. Again, this so that the employee can have that benefit in the future if needed, but it is an added monthly expense for you. Your business does not pay employment insurance to, or for, a contractor.

Vacation pay

The Canada Labor Code provides for annual vacations for employees. Employers are required by law to pay this to employees, where this is not applicable to contractors. If contractors choose to take a vacation, this is at their own businesses expense.

Workers’ compensation

As an employer, you are legally required to have workers compensation coverage for your employees. This expense is across Canada, though each province has its own Worker’s Compensation Board (WCB), with North West Territories and Nunavut sharing a board. Specifically, in British Columbia this coverage falls under WorkSafeBC .

If you hire a contractor, this expense is their responsibility to pay. As a business owner, you only need to ensure that they are paying their premiums by requesting a clearance letter.

Termination or severance pay

If you decide to let an employee go, there are guidelines and requirements as to what you need to pay them a as severance, depending on how long they worked for you. A contractor is typically hired for a specific task and period of time under a contract. If there are any disputes, how they are dealt with should be addressed already within the contract.

Overtime

Labor laws require you to pay overtime to your employees over certain allotments of time, which is an increase in pay rate, or additional time off for the employee. Again, this is something that you don’t have with contractors, as you either have a set price contract in place or you have set an hourly pay rate that doesn’t change with the number of hours they work.

If you aren’t sure if you have an employee or contractor working for you, you can review the CRA’s guidelines that they have listed out in the RC4110 Employee or Self-employed document.  If you are ever audited, this is what they will reference to determine the worker’s employment status. 

If the CRA determines that your contractors are actually employees, you will be held responsible for all of the payroll deductions mentioned above. As well, any deductions they may have claimed as a contractor on their taxes will also need to be reversed. 

Some of the factors that the CRA will look at include:

Control

As the employer, do you have control over what the individual in question is doing? If you can set the individuals hours and daily tasks, they are more likely to be classified as an employee. If they have control over how and when the work is performed, they are more likely to be a contractor.

Financial Risk 

Does the individual have any risk associated with working for you? If there is a chance that they could lose money working for you when a job takes longer than expected, they are likely a contractor. An employee on the other hand simply gets paid their salary no matter how long a job takes. An employee also isn’t expected to cover overhead costs or maintenance of equipment. The same doesn’t hold true for a contractor.

Tools and equipment 

The government will look at whose tools are being used to complete the work and whether or not there has been a significant investment in the tools. Where an employee may on occasion use some of their own tools, a contractor will have invested in their tools that they use and are responsible for any maintenance.

Subcontracting work or hiring assistants

If the individual in question can hire someone else to do their work for them, or hire an assistant, they are likely not an employee. Employees typically cannot hire a helper in order to complete the work they were hired to do themselves.

Responsibility for investment and management

If there has been a significant capital investment made by the individual, they are typically a contractor. An employee doesn’t have the opportunity to make business decisions that will affect your profit or loss in your business. An employee’s work may be integral to your business, but they are hired only to do their work.

If there is a question as to whether an employee or contractor would be beneficial to your business, consult your accounting professional and they can help you determine which will work better for you and your company. Likewise, if you need help determining which of those you already have employed, they can help to clarify this for you.

Need help from an expert?

Still not sure which of these are better for your business?  Let one of our experts at Valley Business Centre help. For over 30 years, Valley Business Centre has been providing comprehensive bookkeeping, payroll and tax services to our clients in Whistler, Squamish, the Sea to Sky Corridor and metro Vancouver B.C. areas. Valley Business Centre provides reliable and effective services to all clients. 

Disclaimer

This article is written for informational purposes only. It is current at the date of posting and changes to laws and regulation may result in the information becoming outdated. It is not intended to provide legal, tax, or financial advice. It is recommended that readers get advice from a tax professional before making any final decisions.

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