Differences Between an Employee and a Contractor

Understanding the distinctions between employees and contractors is crucial, as each classification has its own set of advantages and disadvantages for both the hiring company and the individual. Here’s an overview:

For the Hiring Company:

Contractors: Payments to contractors are not subject to withholding tax, and the company is not obligated to make contributions to the Canada Pension Plan (CPP) or Employment Insurance (EI) on their behalf.

Employees: Hiring employees entails additional expenses, such as taxes and benefits (CPP, EI, health insurance, etc.), which are not applicable for contractors.

For the Individual:

Contractors: Contractors can deduct a wider range of business-related expenses compared to employees. This includes costs related to tools, equipment, and other business expenses.

Employees: Employees typically enjoy greater job security and benefits, such as health insurance and retirement plans, which are not available to contractors.

The Canada Revenue Agency (CRA) considers several factors when determining whether a worker is an employee or a contractor:

1.     Control Over Work:

Employees: Work under close supervision and control by the employer, who dictates how tasks should be performed.

Contractors: Have more autonomy over how they complete their work, including the methods and processes used.

2.     Tools and Equipment:

Contractors generally supplies their own tools and equipment for completing the work.

3.     Financial Risk:

Contractors: Assume financial risks such as fixed costs, unreimbursed expenses, and investments in tools and equipment.

Employees: Generally do not bear such financial risks.

4.     Opportunity for Profit:

Contractors: Have the potential for greater business profit or loss, with control over their expenses and income.

Employees: Typically do not invest capital in the business and do not have the potential to experience business profit or loss.

For more information on how to accurately determine your classification or to receive advice tailored to your specific situation, please Contact Us. We’re here to offer personalized guidance based on your unique circumstances.