Employee Vs Independent contractor
If you are running a business in Canada, then you should be aware of the fact that there are marked differences between independent contractors and employees in the country.
The Canada Revenue Agency makes certain distinctions between the two groups in relation to taxes. Businesses do not have to make CPP, EI and tax deductions when they hire independent contractors, but they do have to make payroll deductions while contributing their own share of CPP and EI when it comes to employees on the payroll. Canadian law, hence, tries to separate the two groups, but the lines are often confused by small businesses.
According to Intuit Canada, freelancers and independent contractors will constitute 45 percent of the workforce in Canada by the year 2020. More and more people are entering self-employment because of its flexibility. For example, 19% of self-employed workers choose to work part-time.
If you are confused about whether to hire regular employees or independent contractors, you can consult our list of pros and cons for both.
So, Why Should You Hire an Employee?
An employee will be on your payroll until you decide to terminate his or her services.
Pros of Hiring an Employee:
- An employee is willing to make a long-term commitment to your company. You can depend on their dedication and loyalty, even when the company is not at its best. An independent worker is more likely to look out for his or her own good. The sense of family and loyalty can also help employees be more productive at their job. Moreover, faithful workers will not shy away from the idea of taking on additional duties if that will help your company progress.
- Usually, a team of employees is able to divide and share duties better than individual contractors. The staff is willing to play different roles, depending on the requirement of the day. As a result, they get to learn new things and widen their repertoire. You will be left with a workforce that is flexible and multi-talented.
- An employee is much easier to control. You will have a say over the workflow of the employees, and you can coordinate projects closely. They will be more likely to meet your deadlines than freelancers who do not have to fear for their job.
Cons of Hiring an Employee
- Employees are like an extra responsibility for your company because you will have to provide for his or her family every month. An employee is a permanent addition to your payroll, and you cannot fire them without a proper reason.
- You will have to cope with many overhead costs if you try to manage a large workforce. Not only will you have to cover the employee benefits and monthly payment, but you will also have to invest in a bigger office space.
- When you have a growing workforce, you will find yourself shifting to people management duties rather than actually controlling the direct output of the company.
Hiring an Independent Contractor?
An independent contractor will provide you with flexible services.
Pros of Hiring an Independent Contractor
- Having an independent worker will allow you to change the work demands of your company freely. You will be able to regulate the work opportunities and cut down when you are going through a rough patch. Moreover, you can expect independent workers to be highly trained.
- You are less likely to come across overhead costs. You will not have to pay regular expenses and offer benefits. As a result, you will be saving overhead costs allowing you more time to bring in business revenue.
- Small businesses find it really difficult to meet the cost burden of employee health benefits. That is a tricky situation because all employees deserve that extra layer of protection. However, independent contractors are not entitled to these benefits.
Cons of Hiring an Independent Contractor
- You do not have complete control over independent contractors. They will have the freedom to decide how much of an active role you can play. They are also free to take up additional projects along with yours, which can reduce their commitment in the long run.
- An independent contractor sets his or her prices depending on the demands of the project and the market demand. There is no fixed rate that you can rely on.
The penalty for misclassification can be severe. Canada Revenue Agency has explained in detail the difference between an Employee and Self Employeed here.
The tax benefit of hiring independent contractors is leading to more and more employers opting for them. It is important to check whether your Canadian independent contractor has been verified by the CRA to avoid employee misclassification. Otherwise, you can hire regular permanent employees and take them under your wing.
Employees are subject to payroll deductions like Canada Pension Plan (CPP), Employment Insurance (EI) and income tax deduction. The employer has to make CPP and EI contributions too.
Independent contractors pay their own CPP as Self employment taxes based on the income earned from self-employment.
If you are an employer you must file information returns T4, and T4A every year. Read here.
Employees who incorporate themselves may fall under the trap of Personal Services Business (PSB)
Tax Question: IT Contractors who want to incorporate themselves, beware!
The above blog is for informational purposes only and cannot be considered as advice for you or your business. For any questions related to Taxes, Bookkeeping and Accounting for Small and Medium Businesses in Ontario, Canada, please contact us at (647) 724-4308, visit www.maroofhs.com or write to us.