What is the difference between being a Self-Employed Contractor vs. being an Employee (Advantages, Disadvantages, Potential Risks)?

In this Blog you will learn:

-The difference between being self employed vs being an employee.

-The Factors to consider and key indicators to look at when choosing to classify.

-Canada Revenue Agency – Potential Risks (Self-Employed Contractor vs. Employee)

-Self-Employed Contractor vs. Employee- Advantages and Disadvantages

What is the difference Self-Employed Contractor vs. Employee Differences?

An employee is on a company’s payroll and receives wages and benefits in exchange for following the organization’s guidelines and remaining loyal. Whereas a contractor is an independent worker who has autonomy and flexibility but does not receive benefits, such as health insurance and paid time off.

Factors to consider:

Control

Who controls where, when, and how the work gets done? Who is in control of the working relationship? The degree of control or independence needs to be assessed.

Control Indicators – Employee

• The payer will often direct, scrutinize and control how and when the work is done.
• The payer controls both the method used to do the work and the results of the work.
• The payer controls the method and amount of pay. Salary negotiations happen in an employer-employee relationship.
• The payer decides what jobs the workers will do.
• The worker requires permission to work for other payers.
• The worker receives training or direction on how to do the work from the payer or other workers.

Control Indicators – Self-employed Contractor

• Contractors work independently from the payer.
• The worker does not have anyone overseeing their activities
• The worker is free to work for other payers and can provide services to different payers at the same time.
• The worker can accept or refuse work from the payer.
• The working relationship has no degree of continuity or loyalty as there is with an employer-employee.

Tool and Equipment (Ownership)

Consider who provides the tools and equipment necessary to complete the job.

Tools and Equipment Indicators – Employee

• The payer supplies most of the tools and equipment to complete the work.
• The payer is responsible for repair, maintenance and insurance costs of the tools and equipment.
• The payer retains the right to use the tools and equipment.
• The payer reimburses worker for any equipment purchases.

Tools and Equipment Indicators – Self-Employed Contractor

• The worker provides the tools and is responsible for repairs, insurance, and maintenance of these tools and equipment.
• The worker has made a significant investment in the equipment and retains the ownership.
• The worker supplies his/her own workspace and does substantial work from that site.

Subcontracting Work

Can the worker hire an assistant or subcontract the work? This impacts their chances of profit or loss.

Subcontracting Work Indicators – Employee

• The worker can not hire an assistant or subcontract the work out.
• The worker does not have the ability to send someone to do the work in their place

Subcontracting Work Indicators – Self-Employed Contractor

• The worker does not have to complete the work personally. They can hire somebody to do the work.
• The payer has no say in whom the worker hires.

Financial Risk

Financial Risk and Reward Indicators – Employee

• The worker is not usually responsible for paying any of the operating expenses.
• The working relationship between the worker and the payer is ongoing.
• The worker is not financially liable if they do not fulfill their obligations.
• The payer chooses and controls the method and amount of payment

Financial Risk and Reward Indicators – Self-Employed Contractor

• The worker is able to hire and pay helpers to assist in the work.
• The worker completes much of the work from their own workspace and incurs expenses related to operating that space.
• The worker is hired for a specific job rather than on an ongoing relationship.
• The worker can be financially liable if they do not fulfill the obligations of the contract.
• The worker does not receive any protection or benefits from the payer.
• The worker advertises and actively promotes their services.

Investment and Management

Is the worker required to make any investment to provide the services?

Investment and Management Indicators – Employee

• The worker has no capital investment in the payer’s business.
• The worker does not have a business presence.

Investment and Management Indicators – Self-Employed Contractor

• The worker has capital investment in the project.
• The worker manages their staff.
• The worker hires and pays staff to help do the work.
• The worker has established a business presence.

Opportunity for profit

Opportunity for profit Indicators – Employee

• The worker is not normally able to realize a business profit or loss.
• The worker is entitled to benefit plans that are normally only offered to employees

Opportunity for profit Indicators – Self-Employed Contractor

• The worker can hire a substitute and the worker pays the substitute.
• The worker is paid by a flat fee and incurs expenses while carrying out the services

Canada Revenue Agency – Potential Risks (Self-Employed Contractor vs. Employee)

If the Canada Revenue Agency determines a Self-Employed Contractor that the business hired, is later determined to be an employee, the business could lose big financially. The employer will have to remit unpaid taxes and might even be subject to penalties and interest. All those CPP and EI premiums will have to be paid.

As for the contractor, business expense deductions claimed in previous years will have to be repaid. This can have catastrophic financial repercussions in cases where the individual has claimed deductions through several prior years that were all disallowed by the CRA. That could be a big tax bill.

Self-Employed Contractor vs. Employee- Advantages and Disadvantages

Employee

Advantages

• Various employee benefits including, but not limited to, disability insurance, provincial medical plan, vacation pay, extended health benefits, workers compensation coverage, and pension plans
• Compensated for with a Salary or Wages
• Record keeping of income and expenses not required
• Eligible for employment insurance (EI)
• 50% of Canada Pension Plan (CPP) premiums paid by employer
• Qualify for Canada employment tax credit
• Difficult to be terminated, more job security
• Severance pay is usually applicable on terminations

Disadvantages

• Expenses are rarely tax-deductible
• Required to pay employment insurance (EI) premiums
• Little control over work schedules and conditions

Contractor

Advantages

• Many expenses are tax-deductible, such as client entertainment or business travel
• Registering for a GST, PST or HST account can improve cash flow
• Unless voluntarily paid, no employment insurance (EI) premiums required
• Able to work with multiple customers at a time
• Flexible working conditions and hours
• Opportunity to control and increase your own profits

Disadvantages

• Responsible for paying employee and employer portions of Canada Pension Plan (CPP)
• Cannot collect employment insurance (EI), unless voluntarily paid
• Severance pays not applicable to terminated contractors
• Contractors bear the risk of loss
• Responsible for purchasing and maintaining tools and equipment
• Contractor liable if contractual obligations are not fulfilled, liability insurance might be necessary
• Record keeping of income and expenses is needed and might require a bookkeeper or accountant 
• Financial management necessary to ensure timely payment of taxes, payroll, and other large expenses
• No employee benefits
• Registering for a GST or HST account is usually required