You’ve been offered a contract by your new employer. You deserve a high five! It can certainly be an exciting time, especially if you’ve been on the job search for a while.
But, hold on a minute. Before you eagerly sign the contract, you’ll want to understand whether you’ll be classified as an employee vs. an independent contractor. Here we’ll explain what each means and the differences between the two. This way, you can define your employment status and understand what the tax implications will be when you file your return with the Canada Revenue Agency (CRA).
- Employees work for a company and receive recurring paycheques and benefits; are given the training and tools needed to perform their jobs; and have an employer who dictates their schedule, location, and job directives.
- Contractors work independently and are compensated when a project is completed. They decide their wage, work schedule, and where they work.
- Understanding your employment status will help you file your tax return correctly with the CRA.
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What is a contractor?
A contractor (aka an independent contractor or a freelancer) is an individual who is self-employed and works independently. If you are a contractor, you usually don’t have a boss you need to report to or who supervises you. A perk of being a contract worker is that you can accept or decline work.
The business entity for a contractor will fall under one of these three categories: a sole proprietor, a partnership, or a corporation. If you’re one of these, you’re usually given a specific project, which could be short-term or long-term. Oftentimes, contractors will accept work from several companies at once. Because of this, there’s usually not much job security and loyalty to one specific company.
What is an employee?
An employee is an individual who works for an employer. If you’re an employee, you typically have a supervisor to report to or have subordinates. Your company will outline the role and responsibilities you must follow. Usually you’re provided with formal training and will learn about your company’s culture and goals. Typically, you’ll receive a regular paycheque and have some level of job security. Some companies will have a non-compete clause outlined in the contract.
Employee vs. contractor: the differences
Answer these 5 questions to determine whether you are an employee or an independent contractor. You may discover that it’s not as complicated as you may think.
1. How are you getting paid?
In terms of compensation, you’re an employee if:
- You’re on the company’s payroll.
- You see standard deductions on your paystub from employment insurance (EI), Canada pension plan (CPP), and income taxes.
- Depending on your employer, you may also make contributions to the company’s stocks or pension plan. As a bonus: they may match your contributions up to a certain percentage!
- Your employer withholds and submits your taxes.
- Your work hours and pay rate are set by your employer.
- You receive a regular paycheque.
- You are offered a benefits plan (for example, health, dental, vision care) and an insurance plan (for example, travel, accident, life).
Compensation terms are often much looser if you’re a contractor. For instance:
- You make an agreement with the company for payment of your services.
- If you receive US income for goods and services provided with a 1099 Form, you would include this as foreign income on your tax return.
- However, if you receive US income without a slip, you’ll convert to Canadian dollars and add it to your business income and claim it as one amount.
- The company doesn’t withhold your taxes. You’re also responsible for reporting your own income and paying the applicable taxes.
- Based on your net income, you’ll contribute a percentage toward your CPP.
- You can set your own hours and rates (such as an hourly wage or flat fee).
- You are often paid after a project is complete.
- A benefits and insurance plan will be your responsibility to secure for yourself.
2. What type of flexibility do you have?
When it comes to flexibility in your work environment, you know you’re an employee if:
- You need approval from your employer to take time off. However, you get paid during vacation days, sick leave, and statutory holidays.
- You’re obligated to work solely for this one company.
If you’re a contractor, job volume and structure are usually yours to determine. For instance:
- Taking time off from work is completely in your control, but you won’t make any money (sorry!).
- You can take on multiple clients simultaneously.
3. Do you have autonomy over when, where, and how your work is completed?
Typically, employees don’t have control over many things. So, you know you’re an employee if:
- You are hired and expected to follow the directions given by your employer.
- You usually have a boss to report to and have set work hours.
- You are required to either commute to a workplace, maintain a hybrid work schedule, or work remotely (the latter quite a bit more common than it’s been in the past!).
- You’re normally not allowed to hire subcontractors to do your work.
It looks something like this familiar scenario: Jessica works a 9-to-5 schedule from Monday to Friday, with a half-hour lunch break every day. She works a total of 37.5 hours (5 days x 7.5 hours) per week. (Yep, you’re an employee.)
The level of control over your job changes if you’re independent. So, you know you’re a contractor if:
- You work autonomously. You don’t have subordinates or supervisors.
- You set your own hours, and the company doesn’t specify how tasks are to be completed.
- You can work remotely (unless your job requires you to be in person).
- It’s generally accepted that you can hire a subcontractor or an assistant to perform some of the work on your behalf.
For example, Jordan is a graphic designer. He chooses to work on weekday evenings at home. He is working on multiple short-term projects with various clients. If he wants to go out and walk his dog during that time, no one stops him from doing so.
4. Are you required to complete company training?
Permanent jobs in which you’re an employee usually require you to understand company rules and style of work. You’ll know this is the case if:
- During the onboarding process, you go through extensive training lasting several weeks to months.
- Not only are you required to understand the intricacies of your role, but you’ll be tasked with liaising with various teams in order to learn more about the company culture.
- You may sign up for professional development courses offered by your employer to improve your skills.
However, you’re usually on your own when it comes to job training if you’re a contractor. For instance:
- The employer gives you specific information only about the project you’re working on.
- It’s unnecessary to learn about team dynamics and the company culture (unless the company proactively shares this information with you).
- You register for professional development courses and pay out of pocket—but you can claim them as expenses when you file your taxes.
5. Are you provided tools to do your job?
Tools and equipment are a given if you’re employed by a company. So you should consider yourself an employee if:
- Your employer gives you a laptop, phone, or other equipment to do your job. (An exception to the rule: skilled tradespeople such as carpenters and mechanics sometimes use their own tools even though they are classified as employees.)
- Your employer is responsible for repairing, maintaining, and insuring the equipment.
If you’re independent, you’ll need to know and understand the tools required to perform your job(s). So, you’ll know you’re a contractor if:
- You need to provide your own tools and equipment.
- You are responsible for the repair, maintenance, and insurance of the equipment.
- You have to create your own work space and absorb the cost of maintaining it.
Feel confident in your employment status when it comes to your taxes
Now that you know all the factors, you can learn the tax implications for those who are self-employed compared to those who are employees. There are differences in the way you file and how your taxes are handled. As you advance in your career, you may dabble in both types of employment to see what best suits your lifestyle.
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