Determine if you are an employee or an independent contractor

To read more chapters, click below:

Chapter 1: Beginner’s guide for self-employed taxes  

Chapter 3: How to complete your tax filing as a sole proprietor?

Congratulations on the new contract that you just got from your new employer. It is indeed a result of your hard work and dedication. But before you sign the contract, it is best if you understand whether you would be put in the category of an employee or an independent contractor. In this chapter we’ll discuss what both of these terms mean and brief details about them. It will be really helpful in defining your employment status and also will help you understand the tax implications that you need to keep in mind while filing your tax return.

If you are an employee of a company, you receive regular pay checks and predetermined perks. They undergo training and are equipped with necessary tools for their roles. Their schedule, work site, and tasks are determined by the employer. On the other hand, contractors operate autonomously and get paid upon project culmination. They have control over their pay, working hours, and work location. This is one of the main differences between an employee and an independent contractor.

Who is an employee in Canada?

An employee in Canada is an individual who works under an employer-employee relationship. This means they provide their services to an employer in exchange for wages or a salary. In Canada, the distinction between employees and independent contractors is important for determining things like tax obligations, employment rights, and benefits. Generally, employees have their work conditions, schedules, and tasks set by the employer, and they may be eligible for various employment benefits and protections as defined by Canadian labor laws.

Who is an independent contractor in Canada?

A freelancer, also referred to as an independent contractor, is an individual who operates their own business and works autonomously. When you're a freelancer, you typically aren't accountable to a superior for reporting or supervision. An advantage of freelancing is the ability to select which projects you take on.

Contractors typically fall within one of these three business categories: sole proprietorship, partnership, or corporation. If you fall under any of these, you're generally engaged for a distinct project, varying in duration from short to long term. Freelancers often undertake assignments from multiple companies simultaneously. Consequently, job security and allegiance to a single company are generally limited. Canada Revenue Agency (CRA) has set certain criteria for independent contractors which include –

• Level of control: Individuals are required to have autonomy over their scheduling and work tasks. The company cannot enforce a fixed 9-to-5 work schedule.
• Tools and equipment: Contractors are responsible for providing their own tools. For instance, an independent electrician should invest in their own toolkit, while administrative contractors must possess their personal computer and mobile phone.
• Financial risk: Contractors undertake the risk of potential profit or loss. As an example, an independent salesperson engaged in a contract to promote a product must have the potential to generate significant revenue – or potentially none if they fail to persuade people to make purchases.

Difference between an employee and an independent contractor

Here are the 5 main differences between an employee and an independent contractor in Canada.

1. The way each is paid

You will be considered an employee if –

• You are an active member of the company's workforce.
• Your paystub displays the standard deductions encompassing employment insurance (EI), Canada pension plan (CPP), and income taxes.
• In some cases, you might also allocate funds towards the company's stocks or pension plan, and there's a possibility of your contributions being matched to a certain extent.
• Your employer is responsible for withholding and submitting your taxes.
• Your work schedule and compensation rate are determined by your employer.
• You receive a consistent paycheck.
• You have access to benefits such as health, dental, and vision care, along with insurance coverage for travel, accidents, and life events.

Compensation terms for an independent contractor might be slightly relaxed and these include the following –

• You establish a contractual agreement with the company to determine compensation for your services.
• If you receive income from the US through a 1099 Form for provided goods and services, you'll need to incorporate this as foreign income in your tax return.
• In case you receive US income without an official statement, you'll convert it to Canadian dollars and incorporate it into your business income, treating it as a singular amount.
• The company doesn't withhold tax deductions, and it's your responsibility to declare your earnings and fulfill your tax obligations.
• Depending on your net income, you'll contribute a percentage towards CPP.
• You have the flexibility to set your own work hours and rates, whether they're based on an hourly wage or a fixed fee.
• Payment often follows the completion of a project.
• Arranging a benefits and insurance plan is your own responsibility.

2. Type of flexibility you have

Obtaining consent from your employer is necessary in order to request time off. Nevertheless, you receive compensation for your days off, including vacation time, sick leave, and statutory holidays. Your commitment is exclusively to this particular company.

On the other hand, you can consider yourself an independent contractor if you get to decide the volume of work for yourself. You don’t need prior permission to take time off as you are your own boss. And you are also free to take multiple clients at the same time.

3. Autonomy over when, how, and where the work can be completed

In most cases, employees don’t have a control on a lot of things.

• Upon being recruited, you're anticipated to adhere to the instructions provided by your employer.
• Usually, you have a superior to whom you report, and your work hours are predetermined.
• You are obligated to either travel to a physical workplace, adopt a hybrid work arrangement, or engage in remote work (which has become notably more prevalent than before).
• Generally, you're prohibited from subcontracting out your tasks.

If you are a freelancer or an independent contractor, you have more control on these situations.

• You operate independently, without any direct reports or overseers.
• You have the liberty to establish your own work hours, and the company doesn't dictate the methodology for task completion.
• Remote work is often an option (unless your role necessitates in-person presence).
• It's commonly acknowledged that you can enlist a subcontractor or an assistant to carry out certain tasks on your behalf.

4. Company training

If you are an employee, it is likely that you would have to undergo some or the other kind of training. These are mainly to understand the rules of the company and the working style. You’ll know you are an employee if –

• Throughout the onboarding phase, you undergo thorough training that spans several weeks to months.
• Your responsibility extends beyond comprehending the complexities of your position; you will also engage with multiple teams to gain insights into the company's culture.
• Participating in employer-provided professional development courses is an option you can consider to enhance your skill set.

However, if you upskill yourself on a regular basis and there is no mandate of job training, then you are likely to be an independent contractor.

• The employer furnishes you with precise details solely pertaining to the project at hand.
• Understanding team dynamics and assimilating into the company culture is not mandatory, unless the company takes the initiative to provide such insights.
• You have the option to enroll in professional development courses and cover the costs personally, which can later be claimed as expenses when you complete your tax filing.

5. Provision of tools at the job

If you are an employee in Canada, you would be provided with the required tools and equipment. Your employer provides you with essential tools such as a laptop, phone, or other necessary equipment to fulfill your job requirements. (There's a notable exception for skilled tradespeople like carpenters and mechanics who might use their personal tools despite being categorized as employees.) It is your employer's responsibility to handle the repair, upkeep, and insurance coverage of the equipment.

For those who work as an independent contractor, the scenarios can be slightly different. You need to have and manage your own tools and the required equipment. You are the one responsible for repair, maintenance, and insuring your tools. And you need to make your own work space and bear all the cost for maintaining it.

Taxes that independent contractors have to pay in Canada

Being a self-employed contractor carries greater obligations towards the government compared to being an employee. When you work under an employer, your income taxes, CPP, and EI contributions are deducted automatically from your every paycheck. Your responsibility primarily involves filing your income tax return each April, with the potential of receiving a refund.

These are the two main taxes that an independent contractor must pay –

• Income tax

In your role as an independent contractor, you are responsible for handling your own income tax submissions. If you operate as a sole proprietor, the process involves determining your net income and submitting the corresponding taxes for the designated period. However, if you opt for incorporation, you must complete both a personal and corporate income tax return.

• Collecting HST

You're obligated to apply a tax to your clients' charges. In Ontario, this tax is the 13 percent HST. Different provinces have varying rates. It's essential to consistently submit the HST, wherein you can offset the HST you've disbursed with the amount you've gathered.