Employees vs. Contractors: How to Tell the Difference

As a business owner, you know you need reliable people to help keep your operation running smoothly.   But something that can be harder to wrap your mind around is the different types of workers you can hire. There are employees, and there are contractors, but they are not the same thing.   It’s important that you don’t confuse the two, as that can spell trouble with the Canadian Revenue Agency, and can cost you valuable time and money. We’ll dive into the difference between the two next and everything else you should know before choosing your next employee.   Main Difference Between Employees and Contractors   The general baseline for telling the difference between a contractor and an employee is this:   Contractors carry out services as a person in business for themselves, while employees carry out services for their employer.    For example, a company might hire a contractor to repair something in the building, but they would hire an employee for a longer term position that has a more general scope.   How to Tell the Difference Between Employees and Contractors   While the previous definition is quite simple, it gets more complicated in the real world. More complex working relationships can blur the distinction.   Thankfully, there are six questions you can ask yourself to help determine if you are hiring an employee or a contractor:  

1. What was the intention at the start of the working relationship?

 

1. A contract of service indicates an employer-employee relationship.

 

1. A contract for services indicates a payer-contractor relationship.

 

2. Who controls how and when the work is done?

 

1. An employee is subordinate to the payer in the general work environment.

 

1. A contractor has the ability to accept/refuse work, and to complete work on their own schedule.

 

3. Who provides the tools to do the job?

 

1. Employers either provide tools to their employees, or reimburse employees once they obtain their own.

 

1. Contractors provide their own tools.

 

4. Is the worker able to hire an assistant or subcontractor?

 

1. Employees are not able to unless the employer indicates otherwise.

 

1. Contractors can hire assistants and subcontractors without the payer having a say.

 

5. What is the financial stake the worker has in the business?

 

1. An employee has little to no financial risk or reward opportunity.

 

1. A contractor does have a potential for financial risk and reward.

 

6. Does the worker invest in the company in order to provide their services?

 

1. Employees do not invest capital, provide tools, or have a business presence.

 

1. Any type of investment in the company indicates that the worker is a contractor.

  These questions serve as a guideline, but it can still be difficult to clearly understand the type of relationship you have or want for your business. More on that next.     Help with Contractor vs. Employee Questions    Answering these questions to the best of your ability will point you towards your answer. But note that these answers are not always hard and fast. Every situation is unique.   If the answer is still unclear, you can request a ruling from the CRA through a My Business Account, or by filling out a Request for Ruling form.   If you find yourself struggling to determine whether you have an employee or contractor, you are not alone. Ultimately, the answer to whether a worker is an employee or a contractor is subject to professional judgement. This is where a trusted accountant comes into play.   At Arvind Betala, we have both experience and expertise in these exact types of situations. We can review the details with you to aid in determining what type of worker you’ve hired and help you through the tax implications of both. Contact us today for more information.       The Gist of Employees and Contractors   Both employees and contractors can be assets to your business. Understanding the difference helps you get the help you need while keeping accurate records and filing your taxes correctly.   Have more questions about your small business’ bookkeeping? Reach out to us today for help.