Follow the rules and both you and your hire can save some tax dollars and ease the payroll process. Get it wrong, and both parties can face some serious penalties.
The main benefits of hiring an independent contractor from the employer’s perspective stem from the lack of employer responsibility.
When you hire an independent contractor, you are not responsible for obtaining a SIN, signing a TD1, or best of all, making payroll deductions. If you owe your independent contractor $1,000, you pay him $1,000 (plus sales taxes if applicable).
Think Steve the delivery guy who you hired to deliver a package that one time. Steve invoices you and you pay him what he asked for – simple as that. Of course, if you don’t like the work that Steve did, you don’t have to call him again. No need to worry about any wrongful dismissal suit or severance pay, he just doesn't show up again.From Steve’s perspective – he receives the full $1,000 that he billed you, without any deductions.
In addition, he gets to subtract his business expenses – fuel, car insurance, packaging, etc. from the $1,000. So while Steve receives $1,000, he may only be paying tax on $750, net of expenses. He also isn't obligated to pay employment insurance premiums. Obviously on a grander scale, the tax savings can be significant.So if everybody wins, why not simply hire independent contractors?
As you may expect, the CRA has put some strict rules in place to determine whether your new hire is an independent contractor or an employee. Here are 5 key points to consider:
The issue here is who’s really running the show. When you hire Steve to make your delivery, do you set the terms or does he bill you for his work done? Does Steve have the option of refusing the work? Is Steve free to work for other payers at the same time? Are you training Steve to do the work or does he come with the expertise himself? Basically, if you as a payer are in control of the relationship, determining the wage, time, place and manner in which the work is performed, it is likely that an employee-employer relationship exists. On the other hand, if Steve is in control of billing as well as when and how the job is performed, he may be considered an independent contractor.
Who provides the supplies to get the job done? If Steve owns the delivery truck, pays for his own fuel, and purchases his own packaging supplies, he is more likely to be considered an independent contractor. On the other hand, if you provide the truck, fuel and supplies, an employee-employer relationship likely exists.
Does Steve have the right to hire his own assistants or sub-contractors? If he does, he has a better chance of falling under the independent contractor category. If he has no control over who he hires and must do the work personally, this is an indication that an employer-employee relationship exists.
Is there a chance that Steve will lose money?
For example, if Steve purchases supplies but doesn’t bill enough to cover his expenses, he’ll be at a loss. However, if Steve is reimbursed for all expenses, he’ll have no financial risk.
An independent contractor will bear the risk of not making a profit and incurring losses due to shortage of work, bad debts or an excess of operating costs.
In an employee-employer relationship, the financial risk is on the employer, not the worker.
The integration tests asks how integral is an individual’s work to the business. For example, if Steve runs all your deliveries and is the only means of getting your goods to your customers, he’ll likely be considered an employee.
However, if you have multiple delivery guys and Steve works for a number of payers, he has a better chance of being considered an independent contractor.
Whether or not your new hire is an independent contractor or an employee will significantly affect your responsibilities as a payer.If you’re not sure which category your new hire falls under, speak to your accountant to ensure the proper treatment for your workers.
By taking the time to create the proper structure, you'll ensure you maximize your tax benefits and avoid some major headaches down the road.