Questions and Answers – Employee vs Contractor (Self-employed)
Question: I work for a contractor and I install drywall. I work specific hours and on specific jobs but I am paid as if I am self-employed. I do provide my own tools but I am paid hourly and I am paid the same hourly rate no matter how much drywall I hang. A friend of mine says that if I was an employee I could collect EI when work is slow but my employer doesn’t want to hire me as an employee. I’ve also heard it’s better to be an independent contractor because you can take write-offs for costs you incur as part of your work. Is it better to be an employee or independent contractor and which one am I?
Answer: First off, it doesn’t make a difference what is better, you have to report your income on the basis of how you are employed.
Although being an independent contractor can be more beneficial tax-wise, your friend makes a good point in that, as an employee, you can collect EI, where as, as an independent contractor (self-employed) you are not covered by EI. This can be a very important distinction when work is hard to find.In general, it is the nature and degree of control an employer has over a person that determines whether they are an employee or independent contractor.
There are 6 (six) significant areas that must be considered when determining if you are an employee or an independent contractor:
1) Control – Authority to exercise control over not only what will be done but also the manner of doing it.A worker is usually considered an employee if the employer has control over the details of when, where and how the work is to be done. Note that it does not matter that the control is not actually exercised, an employer-employee relationship will exist if the “right” to control exists.
2) Method of Pay – The payment of work by the hour, week or month can be evidence of an employment relationship. Frequently, an independent contractor is paid for services based on a contract amount, which is computed by estimation of the number of hours that will be required to do the job multiplied by the applicable rate(s) per hour. If the independent contractor completes the work below or above the estimated number of hours, the contract amount may not change and so the independent contractor carries the risk of an additional profit or loss (see #6 below).
3) Hours of Work – A schedule of specific work hours is a strong indication of a employer-employee relationship. Aside from a rough timeline to complete the work, an independent contractor tends to have the freedom to choose their own time of work (time of the day and hours per day).
4) One or More Payers – If an individual provides services for only one payer, that person will likely be found to be an employee rather than an independent contractor. An independent contractor, on the other hand, is free to work when and for whom they choose. Professional corporations are an example of special accounting rules that occur when professionals provide services for only one payer.
5) Facilities, Tools, Materials etc. – Supplying of all necessary equipment by the payer (employer) tends to indicate control on the part of the employer. Where employment requires a substantial capital investment and expensive maintenance it points to an independent contractor situation. It’s important to note thought that in some occupational fields it is customary for employers to use their own hand tools (e.g. automotive mechanics).
6) Risk Of Profit Or Loss – If the worker receives a base payment independent of the amount of production or the results of the work, it is likely the worker will be seen as an employee. An independent contractor tends to carry a risk of profit or loss based on effort. Also, in determining this issue, it can be important to determine who is liable for the results of the work, the payer or the worker.
To answer your question, let’s consider points 1 – 6 and assess if you are an employee or an independent contractor:
Although, at times, it may be more tax beneficial to file as an independent contractor there are additional risks to you, including being reassessed by CRA as an employee and any expense deductions claimed on your tax return being disallowed. This risk is also carried by your employer, as he/she may be assessed for CPP and EI not paid on your behalf.