Not all workers paid to work for you or support your business are employees. In some circumstances, they may be categorized as a subcontractor.
What’s the difference between an employee and a subcontractor?
There are important distinctions that you should know about.
CRA withholding taxes
Employers are required to withhold relevant withholding amounts such as income taxes, CPP and EI from employee’s pay and remit these to the CRA along with the employer matching portion of CPP and EI.
If a subcontractor is hired, no taxes are withheld but you do need to determine if you need to pay PST and GST on the services being paid for.
Vacation pay and other benefits
Under the Employment and Labour Laws, there are minimum rights and benefits that employees are eligible for (varies by province). Rights and benefits deal with vacation time, termination, overtime and more.
If a subcontractor is hired, you simply have an arrangement to pay based on an agreed upon amount. There is no requirement to provide vacation pay, nor terminate the arrangement at any time. Typically, a contract will exist to define rates of pay and other terms.
Work arrangements
Your staff will generally not be working for competitors and will generally be available at your pre-arranged work schedules. If they want to leave your business, notice is generally required to be provided.
If a subcontractor is hired, they may be working with many other businesses in a period of time. The work they perform for you may be on a schedule or otherwise agreed upon arrangement.
Tax filings
Employees will require an annual T4 from their employer. The T4 will identify the total pay and tax withholdings on their behalf. If they employee is required to pay specific expenses out-of-pocket, the employer will need to issue a T2200 to the employee to allow them to deduct these expenses on their person income tax return.
If a subcontractor is hired, receipts for payments are issued and no T4 slip is produced. Construction industries are required to file an annual T5018 – Statement of Subcontractor payments and issue tax slips to all subcontractors hired in the year. Subcontractors will complete their income tax return and deduct their own expenses against this income as self-employed person or corporate income tax return.
As an employer, there are significant differences in the relationship between an employee and a subcontractor.
It is important to establish a clear understanding of the relationship you have with all workers you are paying.
The CRA has identified a set of guidelines to help you determine if you have a relationship with an employee or subcontractor:
Ownership of tools and equipment
If the employer provides most/all tools and equipment to a worker, an employee relationship may exist. Whereas if a worker is required to provide their own tools and equipment to complete the duties of the job, there may be an indication that a subcontractor is hired.
Schedule, ability to refuse work and to hire assistants
If a worker has limited ability to refuse or negotiate pre-determined schedules and roles, an employee relationship may exist. If the worker can make their own schedule, work for competitors and hire assistants as they see fit, there may be an indication of a subcontractor relationship.
Financial risk
Subcontractors will make decisions on pricing, workload and collection of payments from customers. They will have financial risk and the responsibility to manage cash flow of their jobs. If the worker relies on the employer to purchase all materials and pay a regular compensation to them, there is an indication that an employee/employer relationship exists.
Ability to see profit
If favorable market conditions and profits in the business are paid directly to the worker as they perform duties, a subcontractor relationship may exist. If profits of business are returned to the employer, there may be an employee relationship. Performance bonuses and profit-allocation agreements would normally be an indication of an employee relationship.
The guidelines set out above are considered when determining the relationship you have with a worker. The guidelines will not necessarily have straightforward answers and, at times, appear inconclusive. There are other less tangible factors to consider such as intent and duration of the work arrangement.
If you are trying to decide if a work arrangement is with an employee or a subcontractor, reach out to our office for trusted advice and personal service.