Independent contractors work with both large and small businesses. They can have a wide range of backgrounds, including administrative assistant, accountant and consulting engineers.
When working with a company, is it better to be an employee or an independent contractor? Well, there are pluses and minuses to each option. Read on to learn what works best for you and how to stay within the Canada Revenue Agency rules.
How do you define an independent contractor?
An independent contractor provides specific services to a company. They may do work that is similar to the tasks undertaken by an employee but the contractual relationship is different.
With an employment relationship, both parties must make Canada Pension Plan contributions and pay Employment Insurance premiums. Employees have the right to be given notice of termination or receive severance.
On the other hand, an independent contractor gets paid by simply invoicing the company. There are no CPP or EI deductions. The company does not deduct any income tax – it’s up to the contractor to make tax payments to the CRA.
Independent contractors should have a contract outlining any compensation they would receive if the company stops working with them.
What qualifies someone as an independent contractor?
So, can you and your employer simply change your status from employee to independent contractor? Nope. This is a sure way to run into trouble with the Canada Revenue Agency.
The CRA is on the alert for companies and employees that try to avoid payroll taxes, such as Canada Pension Plan and Employment Insurance, by hiring independent contractors.
The government agency lays out several criteria for independent contractors, including:
- Amount of control: The individual must be responsible for his or her scheduling and work activities. The company cannot compel them to work from 9 to 5.
- Tools and equipment: The contractor must provide their own tools. If you are an electrician working independently, you should purchase the tool kit. Administrative contractors should have their own computer and mobile phone.
- Financial risk: Contractors take a chance that they can make a profit or loss. For example, an independent salesperson contracting to market a product should be able to make big revenues – or nothing if they can’t convince people to buy.
It’s not sufficient for both the company and the independent contractor to agree on terms. Both the CRA and the courts have ruled in the past that an “independent contractor” was in fact an employee based on the relationship with the company. If it quacks like a duck, it probably is a duck.
What is an example of an independent contractor?
James is a well-known doctor and hosts a TV show about healthcare issues. He needs an administrative assistant to schedule his speaking engagements, update his website and send out invoices.
He hires Robert to take care of these tasks on a part-time basis. Robert works from home on his own schedule and ues his computer and phone. He has several other clients and provides them with similar services, charging either a flat monthly fee or per hour.
Does Robert qualify as an independent contractor under the CRA rules? Absolutely. He controls his schedule, has his own equipment, and takes a risk that his clients will stick with him for the long run.
What is the difference between self employed and independent contractor?
If you are an independent contractor, then you are self-employed.
Independent contractor vs employee
So, what are the pluses and minuses of being an independent contractor? Here are a few:
Risk: Independent contractors aren’t guaranteed a paycheque every week. Their income depends on how much revenue their company can generate.
Flexibility: When you are an employee, you report to work as scheduled. Independent contractors have more freedom – if it’s a beautiful day and you feel like going for a bike ride, you just do it.
Termination: Employees are entitled to notice or severance payments if they are fired. Independent contractors usually get nothing unless their contract specifies compensation in the event of termination.
What kind of taxes do you pay as an independent contractor?
Being an independent contractor involves more responsibilities to the government than employees. When you have an employer, income taxes, CPP and EI are automatically deducted from each paycheque. All you have to do is file your income tax return every April – and hopefully get a refund.
Here are a couple of tasks that an independent contractor must take on:
- Collecting HST: You must charge your clients tax. In Ontario, this is a 13 percent HST. Other provinces have different rates. You are required to remit the HST on a regular basis, claiming HST you have paid against the amount you have collected.
- Income tax: As an independent contractor, you have to manage your own income tax filings. If you are a sole proprietorship, you simply calculate your net income and remit the tax owing for the period. If you decide to incorporate, you have to file both a personal and corporate income tax return.
How to become an independent contractor
As we indicated, you and your employer can’t simply decide that you are now a contractor. You have to make sure you follow the CRA rules. You may wish to get legal advice.
If you don’t have an employer and want to set yourself up as an independent contractor, it’s easy. You simply decide whether to operate as a sole proprietorship or a corporation. You get a business number from the CRA. And you’re ready to go!
Can independent contractors get health benefits?
An increasingly popular alternative is to set up a Health Spending Account. This allows the independent contractor’s business to claim medical costs as a business expense. This is a great way to reduce taxes – the company can claim an expense and the owner does not have to pay tax on the benefit.
Should you become an independent contractor?
First of all, be sure to follow the Canada Revenue Agency rules about being an independent contractor. In considering whether to make the move to become an independent contractor, determine your appetite for higher risk.
