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Employee vs Contractor: Why Does the Classification Matter?

Everything your company accomplishes depends on both the work of your employees and the services rendered by the contractors you retain. These two types of individuals are treated differently when it comes to taxation, and accurate classification is crucial for several reasons.

Broad Distinctions

Employer-employee relationships and payer-contractor relationships can exhibit some minor similarities, but a wide range of factors make them legally distinct from one another. Typically speaking, an employee follows certain requirements determined by the employer such as reporting location and hours. A contractor, meanwhile, usually dictates when, where, and how they do their work. Employees generally use supplies and tools provided by the employer, while contractors often invest directly in the means of their own work. The risk of incurring losses or the chance of making a profit are also usually factors specific to contractors and not employees.

Taxation and Benefits

Unlike contractors, employees are provided benefits by the employer (such as health insurance and pensions), are more difficult to terminate, and can receive severance pay. They also qualify for employment insurance. Unlike employees, contractors can take advantage of far more tax deductions for work expenses but must also pay both employer and employee Canadian Pension Plan contributions. Considering the costs saved on EI deductions, CPP, and benefits, not to mention various logistical advantages, business owners may seek to hire contractors whenever they can. This is why the CRA is diligent about penalizing worker misclassification.

Why It Matters

Today’s economic landscape is more complex than ever. Countless types of working relationships manifest in different ways. Additionally, the criteria that the CRA uses to define employer-employee and payer-contractor relationships can be quite elaborate. Despite this, it’s crucial for businesses to avoid misclassification at all costs. If you classify a worker as a contractor and they are eventually found to be your employee, you could be liable for unpaid income tax deductions (with interest and penalties) plus unpaid CPP EI, overtime, and vacation. Wrongful termination lawsuits and other forms of litigation are also common consequences of misclassification. If you’re in doubt, consult a professional to be sure!

Are you unsure of whether to classify someone as your employee or an independent contractor? Whatever guidance you and your business may need, our Calgary-based CPAs are always at your service. Give our office a call at (403) 768-4377 to schedule a meeting with us today, we’d love to help!

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