Employee or Independent Contractor – From the Employer’s Perspective
From an income tax perspective, it is important that employers classify workers correctly as employees or an independent contractors to ensure that the employer is in compliance with their tax obligations.
As an employer, you are required to make the appropriate source deductions from remuneration paid to employees. In Ontario, this would generally include income tax, Canada Pension Plan (“CPP”), Employment Insurance (“EI”) amounts. An employer is also required to make their own contributions to CPP, EI, Employer Health Tax, and, if applicable, the Workplace Safety and Insurance Board based on the amount of the employee’s remuneration. Employers are required to report remuneration to the government at the end of each year and issue T4’s to each employee.
If a worker is an independent contractor, there is no requirement to make any source deductions from the payments to the worker. If the independent contractor is a non-resident and providing services in Canada, there may be an obligation to withhold and remit 15% on amounts paid to them (see a previous blog post here about Withholding on Service Contracts with Non-Residents).
During an audit, if the CRA determines that someone who was treated as an independent contractor is actually an employee, the company who retained the independent contractor will be responsible for remitting the source deductions that should have been withheld from the worker’s compensation, and may be subject to penalties and interest on those amounts.
If you have questions about how to differentiate between employees and independent contractors, please contact us to speak with a member of our tax team.