When does a business owner know if they should hire an employee or a contractor?
There are so many decisions entrepreneurs must make on a daily basis. As a business starts to grow, one of the biggest decisions is whether to hire employees or contractors to help. The answer is not always a straightforward. However, if you understand the difference between the two and how Canada Revenue defines employees and contractors you will be able to make a good choice.
On this week’s blog, we are here to help! Let’s go through the rules of what determines the difference between an employee and a contractor so that you can make an informed choice and stay out of trouble with Canada Revenue. (The following is paraphrased directly from Canada Revenue Agency website.)
How much control do you have over the work of the person you are hiring? Depending on the degree of independence held by the hired individual determines whether they are a contractor or an employee. Will you need to give them a lot of direction or will they perform the work as based on the agreement without any overlooking? Consider a plumber that you hire to your home to do the work versus the nanny you hire to come over everyday from 9am to 5 pm. If you find that your relationship is one of subordination with directions, scrutiny, with when and how the work is to be performed, they are an employee.
Tools and Equipment
Who owns the tools used to fulfil the job you are paying the person to do? If you purchased all of the tools needed to perform the job, they are an employee. Almost 90% of self-employed individuals bring their own tools and equipment. The other 10% don’t require them, like a babysitter or caregiver.
Subcontracting Work or Hiring Assistant
Is the person you hired able to hire an assistant or helper to perform the work? Are they able to send someone else to take their place? If the answer is no, then they are an employee. This is a prime example of profit and risk loss that Canada Revenue Agency will be looking for.
When the work is performed and something got screwed up, who will pay for the fix? You, or the person you are paying? If it is the person you hired to do the job, then they are a subcontractor (self- employed). If it is you, then they are an employee because they are not burdening the risk. If they are self-employed, usually insurance is held by that individual.
Responsibility for Investment and Management
This one is a bit tricky, so let’s try to look at it this way: If the person you hire is a contractor (self-employed), they usually have some type of investment in the company. The investment would be like money they previously put in to acquire tools or supplies, or for paid educational training. There is also the management side, if you have hired someone to help you take those steps to train them for the jobs, and you also run payroll. Finally, the last test under this is the presence of the business. Is there a website, social media page, what about advertising to get work? These establish a presence for a business.
These are the measurable tools that the CRA (Canada Revenue Agency) uses to determine if someone holds an employee or contract position. So, what happens if there is confusion about whether the person you hired should be a contractor or an employee? Bring the list to the person you hired and address the situation. The consequences of not properly placing someone as an employee is that they will have back taxes with penalties and interest. Yep, money leaving their pocket unless the above factors are satisfied, or they leave to find another work-position as a contractor.
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