What is the Difference Between an Employee and an Independent Contractor?
As a business grows, entrepreneurs may start considering extra help but aren’t sure where to turn. Do you hire employees or independent contractors? What’s the difference?
It turns out that there’s a big difference, not just for the worker whose help or services you’ve hired them for, but for your business.
Independent contractors also may be faced with deciding if the work they’ve been hired to complete puts them in a position of employee or independent contractor.
It’s important to make sure you know the key differences between employees and independent contractors. That’s where Ownr can help.
Why classifying workers matters
Classifying workers is as important as invoicing and collecting a paycheque. What type of worker you’ve solicited or classified is necessary to set out before any work commences. This directly affects one’s eligibility for employment insurance (EI) and where they fall under employment legislation such as the Canada Pension Plan (CPP), the Income Tax Act, or disability claims.
An employer must remit to the Canada Revenue Agency (CRA) all CPP contributions, tax deductions, and EI premiums on each paycheque. A business that has hired an independent contractor does not. Independent contractors invoice for services provided and must pay their own taxes.
Definition of employees and independent contractors
The CRA website gives clear definitions of what constitutes an employee and a self-employed independent contractor. There are indicators of what constitutes an employee and a self-employed contractor, but there are always exceptions.
An employer/employee relationship is generally a subordinate one where the employee is:
- Generally not responsible for the costs of running the business.
- Not exposed to a time constraint of the worker/employer relationship until employment is officially terminated.
- Not legally liable for business operations or finances.
- Not the determinant of salary and work schedules.
The business relationship between an independent contractor and a business owner is considerably different and is identified by:
- The relationship is not ongoing, but rather, the contractor is hired (or contracted) to do a specific job.
- The contractor does the majority of the work on their own premises and is self-directed.
- The contractor is financially liable for their own business.
- A contractor does not receive any pension or group benefits and must file their own tax contributions.
As an employee, some advantages are desirable to certain types of workers. Employees are generally afforded more job security than independent contractors and do not have to look for work. They don’t need to be quite self-directed as self-employed contractors and often work steady and regular hours. This is advantageous for individuals who have other life responsibilities that require steady hours, such as family rearing or other caregiving.
As a business owner, it can be difficult to hire employees and can often be a point of indecision. There are tools that can help you choose the right employee for your business.
An employee is also eligible for EI, CPP, and other group benefits through their employer, if the employer offers this.
The disadvantages of being an employee are often the reasons why some turn to entrepreneurship. There is very little flexibility in a traditional employment relationship, which may lead to reduced independence and control over who you work with.
An employee is generally not eligible for any profits the business might make. There are some employers who offer bonuses, but this isn’t mandatory.
The advantages to self-employment can be desirable to some and conducive to a more flexible lifestyle… sometimes. It’s important to note that new business owners may have to put in a lot of extra time and hard work to get their business off the ground. With the right tips, the rewards can far outweigh traditional employment.
There is significant independence as a contractor. Your time is your own. If you have a doctor’s appointment in the middle of the day, you don’t need to ask for time off. Just make sure to watch out for common time management pitfalls.
While there can be a large financial investment upfront, all profits go into your pocket, and you may be eligible for numerous tax credits and can claim business expenses on your tax return.
The disadvantages of self-employment can be daunting and the reason why some may choose not to go into business for themselves.
There’s a considerable risk of financial insecurity, particularly with new businesses. Initial overhead costs, including marketing, can sometimes outweigh the capital that a worker can invest. Lack of healthcare benefits, disability and EI, and a pension plan is an additional cost that self-employed contractors need to take into consideration.
Difference between an employee and an independent contractor
1. Independent contractors are business owners
Above all, independent contractors are business owners with all the legal rights and responsibilities that come with business ownership. Employees are hired and paid a salary to perform ongoing services for a business. Employees have no financial investment in the business where they work.
2. Independent contractors are specialists
Independent contractors are specialized in the work that they do whereas an employee should come with some knowledge, but an employer may undertake additional training for that employee. The onus of expertise doesn’t rest with the employee.
3. Independent contractors work with many clients
The business that hires an independent contractor’s services because of the contractor’s client. A self-employed contractor can have a number of clients at one time. An employee usually only works for one employer. Part-time employees sometimes work for more than one employer, provided there isn’t a non-compete clause in their employment agreement.
4. Independent contractors work on specific tasks
Due to the nature of an independent contractor’s expertise, they are usually contracted to do one job. When the work is done, the contract ends. This requires specific tasks that the client has hired the contractor to complete. Alternatively, an employee is hired to complete tasks that are assigned by the employer.
5. Independent contractors submit invoices for payment
An employee receives a salary for hours worked regularly, an independent contractor will invoice for the job completed. This invoice can be broken down into a percentage paid upfront with the remainder due upon completion, depending on the original agreement.
6. Independent contractors set their own hours
One of the most attractive benefits of working for yourself is that you can set your own hours. As long as the work gets done, you can do it at whatever time of the day you want, within reason. Employees are scheduled to work particular hours, and any adjustments have to be approved by the employer.
7. Independent contractors work without supervision
There is little to no supervision of an independent contractor’s work. This is an attractive benefit for both the business owner and independent contractor and coincides with the contractor setting their own hours. However, a business owner may want to inspect the work once complete before paying the invoice.
An employee is supervised to some degree and usually has to check in with a supervisor on a regular basis.
8. Independent contractors are responsible for paying their own taxes
Independent contractors must keep track of taxes like GST and HST they have to remit to CRA at the end of the year. They can charge these taxes to their client on the invoice, but paying them to the government is the contractor’s responsibility.
An employee is not responsible for remitting business taxes to the government. That’s their employer’s job.
9. Independent contractors have their own benefit plans
Unlike employees who are usually eligible for group benefit plans, independent contractors have to purchase their own benefits and contribute to their own retirement savings. However, many employees also choose to open a separate RRSP alongside their CPP contributions.
10. Independent contractors may partner with other contractors
Subcontractors are other self-employed workers who an independent contractor can hire to help complete the job. In this case, the primary contractor is usually referred to as the general contractor. Ensuring subcontractors are licensed is required, and paying subcontractors is the general contractor’s responsibility, as is inspecting the work before the client’s final inspection.
Employees don’t hire others to help them with their job. That responsibility falls to the employer.
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This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.