Tax tip #5: Employees vs. contractors
February 01, 2016

Who is working for your business: an employee or a self-employed contractor? Knowing the distinction between the two can make all the difference when it comes to financial reporting and filing taxes. 

The CRA examines six main factors to determine the relationship between a business and a worker: financial risk, control and autonomy, equipment ownership, hiring, investment, and opportunity for profit. One factor on its own can't definitively place a person in either category - they're evaluated as a unit to determine an individual's relationship to your business.

Employee versus independent contractor
When considering a worker's status, first conclude who has the greater financial risk in the situation. Employees are reimbursed for their expenses, while the self-employed aren't entitled to such payments. They will also have fixed monthly costs even when not working.

Next, determine who is in charge and can dictate the actions of the worker in question. Is the person consistently monitored, and does someone else decide what jobs they'll complete? Or does the worker have the agency to refuse a job? Answering these questions reveals who has control over the task at hand and how much autonomy the worker has.

If a person owns the tools and equipment needed to perform a task, it's more likely he or she is an independent contractor. They're responsible for the initial purchase and any subsequent repairs. A contractor is also able to hire assistants or outside help without requiring the payer's approval.

Finally, a significant investment in the company can indicate a business relationship, thus suggesting the worker is not an employee. In fact, anything implying the person in question could incur a profit or loss suggests they're self-employed. Standard employees have no control over the business but still work within it. Independent contractors, meanwhile, can choose whether or not to accept a working contract, thus altering their potential for profit.

If there's still confusion as to whether your worker is an employee or a self-employed contractor, either party can request a free status ruling from the CRA. Before looking at the six elements above, the agency will ask both you and the worker what the intent was when the two of you began the relationship. They'll review any written contracts as well.

Filing taxes doesn't have to be confusing. Learn more about how Sage helps small businesses and their accountants and bookkeepers navigate tax season.

Nexus: G-WEBCD1