A lot of you may be wondering if there is a difference between an employee and an independent sub-contractor and what each one means and why you would want to hire one over the other.
First off, yes there is a difference between an employee & an independent sub-contractor. The easiest way to differentiate the two are to think of an employee as someone being on your payroll-so every 2 weeks or every week you give them a pay cheque based on their regular pay rate, which is an hourly rate or an annual rate.
In addition to that you have to deduct their EI & CPP contributions and the appropriate income tax deductions if you are doing business within Canada. In addition to that you, as the employer, will have to do your payroll remittances to the CRA (Canada Revenue Agency). Also don’t forget you will be paying for the WSIB premium based on the industry that your business is in. Even if you have 1 employee you will have to pay the WSIB premiums for that 1 employee.
If you are curious to know how much the EI, CPP & income tax deductions are click here to use access a CRA article about this. If you are looking for more information about WSIB premiums and what your particular business would pay, click here for that information.
When you have an independent sub-contractor the person isn’t on your payroll and all of the above doesn’t apply. Typically they are providing you a service of some kind to assist your business, so you pay them based on what the invoice says that they send to you.
Before we go into why you would use an independent sub-contractor it’s very important for you to know what makes them different from an employee on your payroll because this is something the Government of Ontario, particularly is looking at.
The key thing to keep in mind with the difference between an employee and a sub-contractor is around the employment status-this is what determines if it’s an employee or a sub-contractor.
What is looked is if the person is engaged to perform the services as a person in business or as an employee. The CRA has a 2 step process in determining the employment status. The first step is asking the worker and the payer (i.e. you the business owner) what was your intent when you entered into the working arrangement? Did you both enter into a contract of service (employer-employee relationship)? Or did you both enter into a contract for services (business relationship). The best way to show your intent is to have it in a written agreement that both parties agree to (i.e. sign off on). This is what is called an Independent Contractor Agreement.
The 2nd step is to verify the intent of the 2 parties and the CRA looks at the following elements to determine the intent:
- Level of control the payer has over the worker’s activities
- Whether the worker provides the tools and equipment
- Can the worker subcontract or hire assistants
- The degree of financial risk the worker takes
- The degree of responsibility for investment and management the worker holds
- The worker’s opportunity for profit and other contracts
Now you know the difference between the two, and how the relationship between a sub-contractor and a business owner is determined, let’s discuss why you would want to hire a sub-contractor over an employee.
Cost savings is the first and most obvious benefit. You save the costs of paying the EI, CPP contributions, WSIB premiums, payroll remittances, vacation pay (be it paid vacation days or the 4% or whatever your provincial standard is), health benefits, and RRSP plans (so the premiums for the plan itself & the company’s contribution). If you are hiring a sub-contractor you don’t have any of these costs.
Another benefit is the expertise, as you are using professionals in their respective field. While it’s not required by law to use a professional, it’s helpful especially if your business doesn’t have that expertise to begin with. For example, you are a smaller business, and need a website for your company. Yes you can do it yourself, with a variety of options such as Wix or Squarespace . However, if this isn’t your area of speciality it might make more sense to outsource this to a professional who is an expert. You can then focus on what’s important to you-your business by using your time and energy more strategically.
Sub-contractors are great for small short term projects that may come up at any point in your business. It’s not easy to find someone who will want to work for only 3 months. You will spend more time and potentially money doing the search, than if you were to hire a sub-contractor for that short period of time.
When you are using sub-contractors for short term projects this is an area you need to be particularly careful with. This is because if the so-called short term project looks like it’s a long term relationship, where the sub-contractor is doing the same work all the time, 5 days a week, and not working on other contracts; then this is where it can be seen as an employer-employee relationship.
For this reason MKS HR has created a Go-to-Guide for Hiring independent sub-contractors-it goes into more detail about those elements to determine intent, along with a step by step hiring process for when you are hiring a sub-contractor instead.
If you are thinking about hiring an independent sub-contractor, schedule a Discovery Call with MKS HR!