What is there to consider?
You run a business. You have everyone that you need in place but a new client comes up and suddenly you need a graphic designer. You know that the project is going to take months to complete and that you’ll likely pick up other clients that require similar design work. Do you hire a contractor or a permanent employee for the job?
Keep in mind that the difference between a contractor and employee is much more than a cost disparity. There are pluses and minuses to both scenarios; contractors may cost more in the end, but you aren’t required to pay any employee benefits to a contractor. The opposite is often true in an employee scenario. What details should you consider when determining whether someone is a contractor or employee?
There are six specific areas in which you can determine your employee’s status so for the sake of your business, and no one criteria is a deciding factor. Let’s dive into what they are:
- Control – Control is the ability, authority, or right of a payer to exercise control over a worker concerning the manner in which the work is done and what work will be done. Does the worker work independently, are they subject to someone overseeing or directing the work? Does the worker have the ability to accept or refuse the work? Determining the degree of control someone has can be difficult, it is often necessary to focus simultaneously on both the payer’s control over and influence upon the worker.
- Tools and equipment – Consider if the worker owns and provides tools and equipment to accomplish the work. For example, if a graphic designer’s computer malfunctions, is the designer responsible for repairing or replacing the computer? Whoever is responsible for the repair, replacement, and insurance of essential work equipment can have implications over whether the individual is considered a contractor.
- Subcontracting work or hiring assistants – Consider if the worker can subcontract work or hire assistants. This factor can help decide a worker’s business presence because subcontracting work or hiring assistants can affect their chance of profit and risk of loss.
- Financial risk – It is important to take into consideration the degree of financial risk that is taken by the worker, including any costs that may be incurred by the worker, which are not reimbursed.
- Responsibility for investment and management – How responsible is the worker for investment and management of the work – are they required to invest their own financial resources in order to do the work.
- Opportunity for profit – Can the worker incur a profit or loss? In other words, is there a potential that the worker’s costs could be greater than their proceeds? This factor is important to consider from the perspective of the worker. Employees do not typically share in the profits or losses of the business.
Audits are more common than most people think and you don’t want to be involved in a sticky situation. The bottom line is that as business owners, we all have the obligation to pay taxes and operate our businesses legitimately and legally. Though it may be your intent to hire a contractor, without caution, you may inadvertently be employing that person as a staff member.
It is recommended that the appropriate professional or representative be consulted to determine the specific situation.
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Reference: Canadian Revenue Agency. (2014). Publication RC4110. (September 24, 2020).