Suppose you are offered a position that could be an employee or contract position. In that case, it’s essential to understand the key differences between being either an employee or a contractor. So let’s dive into the benefits and drawbacks of each classification.

Employee Classification

Employees who work for a company are paid a salary or hourly wage. They typically receive benefits such as health insurance, retirement plans, and paid time off. In some industries, employees are often hired for long-term projects and have a set schedule.

One of the largest benefits of being an employee is that you have job security. You are guaranteed a set income and benefits if you continue to work for the company. You also have more legal protections, such as workers’ compensation and protection against discrimination.

However, being an employee also means that you have less flexibility. You must adhere to the company’s schedule and work within its guidelines. You may also have limited opportunities for career advancement.

Employee Tax Implications

Employees in Canada are subject to income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. These taxes are deducted automatically from their paychecks by their employer. The income tax deducted is based on the employee’s income and tax bracket.

In addition to these taxes, employers are required to pay their share of CPP and EI premiums for each employee they have. Employers are also required to provide certain benefits to their employees, such as health and dental insurance and paid vacation time.

Contractor Classification

A contractor is hired to perform a specific job or task for a company. They are not considered

employees and are not eligible for benefits such as health insurance or retirement plans. Instead, they are paid a set rate for their services and are responsible for their taxes and insurance.

One of the benefits of being a contractor is that you have more flexibility. You can set your schedule and choose the projects you want to work on. You may also have more opportunities for career advancement, as you can work for multiple companies and gain experience in different areas.

However, being a contractor also means that you have less job security. You are only hired for a specific project or task, and your income is not guaranteed beyond that. You are also responsible for your taxes and insurance, which can be more expensive than if you were an employee.

Contractor Tax Implications

Contractors in Canada are considered self-employed and are responsible for paying their own income tax, CPP contributions, and EI premiums. Contractors are not eligible for benefits such as health and dental insurance or paid vacation time. As a contractor, you may need to register for a GST/HST number and collect and remit GST/HST on your services.

Contractors must pay both portions of CPP contributions, which can add up to a higher amount than employees pay. However, contractors can also deduct certain expenses related to their work, such as office expenses, travel expenses, and supplies, from their taxable income.

Contractor or Employee: Our Expert’s Advice

The decision to become an employee or a contractor depends on your personal preferences and career goals. What it boils down to is you have to take your money needs and habits into consideration because if you’re going to pull all of the money generated by your company to support your personal lifestyle, then it makes no sense for you to incorporate most of all. Mainly because incorporation automatically triggers at least $2000 per year to file a basic T2 tax return and corporate tax return.

Incorporation will also trigger bookkeeping needs on top of having your own insurance and WCB. You will need WCB and insurance as a proprietorship or incorporation, although those needs change depending on your industry.

How you answer questions to WCB is essential if you decide to become a subcontractor, as it can be a requirement to go to work. If the questions are not appropriately answered, WCB will deem that coverage is the employer’s responsibility even though you’re a subcontractor, potentially putting your contract at risk.

If you, as a contractor, don’t dictate your hours, set your price, or have your own tools and equipment, you will not qualify for WCB, and the CRA will deem you a personal services company, which means you will be taxed at a much higher rate. In this case, you might as well have stayed as a proprietorship or structured it differently or as an employee, right?

At the end of the day, if you’re still only working for one client and if you aren’t prepared to take on all of those responsibilities to run a business and manage the financial health of a business, not just your own personal budget, you could be setting yourself up to fail.

We talk to our clients about it from that approach too. You can hire contractors, but are you setting your people up to fail? Are you creating the type of employment environment you want to make for your business using employees or contractors?

There are a lot of big moving parts, but the bottom line is if you’re going to spend all the bloody cash because you don’t have a good handle on your personal taxes and cash, then you might as well not consider being a contractor because you’re going to get yourself into a world of hurt. It’s not rocket science, you can do it, but you must know what you’re doing or find an excellent support team.

From incorporation forward, we work with many contractors to ensure they are set up correctly and have the proper coverage, such as WCB and insurance, so if you still are unsure, drop us a line. We would love to chat. Book your no-obligation alignment assessment today and ensure you are set up for profit from the start.