Employees vs Subcontractors
The main difference between an employee and a contractor is one gets paid a salary, while the other gets paid business income. But if the difference was just in the name, we could call it a day right here and now.
The reason this question arises, is because it is often easier and cheaper to hire a contractor rather than an employee. Primarily this is because one can save on payroll taxes, but also a contractor can deduct many more expenses than an employee can.
While this may provide an incentive to categorize a worker as a contractor, one cannot choose the status of a worker based on personal preference. The CRA has a number of criteria which decides if a worker is an employee or a contractor. If a worker is deemed to be an employee but was treated as a contractor, there will be unpaid payroll taxes and penalties as well as disallowed business expenses to pay back.
Because of this it is worthwhile to be aware of the following criteria which distinguishes between the two statuses:
Risk and reward: If a worker has a risk of profit or loss, then they are generally considered a contractor. If the worker will get paid the same regardless if there is a profit or loss, this usually means employment.
Control: If a worker has control over their hours, workplace, how the work is done, this typically means a contractor. If the worker is not in control of these factors, they are likely an employee.
Ownership of tools: If the worker owns the tools, they may be a contractor. If they don’t own the tools, they are probably employed.
Integration: This factor looks at the clientele of the worker. Does the worker work exclusively for one client? Mostly? This may indicate employment. If the worker has a variety of clients that are given equal attention and provide equivalent revenues this leans more toward a contractor.
While each case is different and individual factors must always be analyzed on a case by case basis, one thing which can help prove the status of a worker is a written contract. Although this can help, it may be prudent to seek advice from a professional in this matter, to avoid what could be significant costs down the road.