Hiring Your First Employee – Employee or Independent Contractor?

It might have started small, but your business is now growing. And after careful consideration, you’ve decided that it’s time to expand your team. 

But what kind of worker is right for your business? Should you hire an employee as part of your company, or would a gig worker (also known as an independent contractor) be better suited to your needs? Let’s explore the differences between the two, and identify how an employee or an independent contractor can fit into your business.

What Is an Independent Contractor? 

In short, an independent contract is someone you have hired for a service. Unlike an employee, they work for themselves, and you are one of their clients. 

Independent contractors typically have more control over their work and how they report to you. Some examples of independent contractors you could hire for services include bookkeepers, accountants, or consultants. Since you aren’t the employer for an independent contractor, there are no deductions or remittances to make for their payment.  

What’s The Difference Between Independent Contractors and Employees?  

In Canada (except for Quebec), there are certain criteria for determining if a worker is considered an independent contractor: 

  • Working definition: did the worker enter a contract of service (as an employee), or a contract for services (as a contractor)? 
  • Does the worker have ownership over how they work? Where is the work done? How is it done? 
  • Is there any financial risk for the worker? 
  • Could the worker make a profit from the work being done? 

This is a little different for businesses based in Quebec: 

  • Along with the above working definitions, the contract of employment by the Civil Code of Quebec defines an employee versus an independent contractor  

Employees typically don’t have much control over their work. While employees don’t directly profit from the business, they are also unburdened with the financial risk associated with the business. On the other hand, contractors are able to have control over and directly profit from their work. With that said, they are also burdened with the risks; a contractor is responsible for their own business expenses, as well as dealing with the financial risks of having a job cut prematurely. 

Why Hire an Employee?

Hiring an employee can be a great move if your business plan includes the need for long-term help. An employee has set work schedules and responsibilities, which can provide you with consistency and dependability. Furthermore, while growing your business, having a long-term employee who is involved and invested as your business scales can be extremely beneficial in the long run. 

Some workers also enjoy the benefits of employment — along with a benefits package and basic entitlements, employers remain responsible for deductions and remittances to programs like CPP and EI. 

Why Hire an Independent Contractor?  

Independent contractors are great solutions for shorter term issues, or if your business needs a very particular expertise for a brief period of time. As an example, you may seek to hire an executive consultant to help with strategy decisions over the next three months. 

Since you are not the employer to an independent contractor, there’s no need to remit or deduct payments to the CRA. Independent contractors assume the risks of the work they take on; your relationship is much more flexible than that if they were your employee — subject to any terms you’ve both agreed upon of course. 

Filing T4A Slips For Independent Contractors  

As a business owner, if you’ve hired the services of a contract worker, you’ll need to file two T4A slips: one slip to the independent contractor, and a T4A Summary to the CRA.  

The deadline for filing both, like other financial deadlines to the CRA, falls on the last business day of February.  

What Should You Include in a T4A?

When filing a T4A, you’ll need to include the following information: 

  • The name or business name of the independent contractor 
  • Their address 
  • The total amount paid for work completed 
  • The GST/HST number, if applicable 
  • Their SIN (social insurance number) if they aren’t registered for GST/HST and have charged over $500 

Independent contractors often will invoice you for the work completed. We recommend you keep those invoices on hand – they come in handy if you’re audited later.  

Misclassifying a Worker 

The CRA checks to see if the taxes being filed are for employees or self-employed contractors. It’s not enough just to classify the worker as a contractor; the CRA may audit to check the status of your worker and if you’ve remitted the required amounts. If you misclassify an employee as a contractor, you could face penalties of 10% on income tax, CPP and EI.  

You’ll also need to pay both your own and the employee’s portion of outstanding CPP and EI, plus penalties and interest owing.  

At the end of the day, there are distinct advantages in hiring an employee or an independent contractor. It’s important to be informed of these distinctions when evaluating the right fit for your business as you expand your team. Whether you need help setting up benefits for an employee or automating remittances for employees and independent contractors alike, we’re here to assist you with all of your business needs.