An independent contractor is different from an employee, the main distinction is that independent contractors have different legal entitlements compared to employees. An employee has an exclusive one-on-one working relationship with their employer, they are ruled under the employment act and the legislation from the act applies to them, independent contractors are not governed under the same statute they have different employment law protections. Companies may prefer independent contractors in Canada because independent contract taxes are not the responsibility of the company and stand separate from the company’s business tax. However, there are still risks involved with such kind of employment.
The risks associated with this type of contract exist but there are ways they can be avoided.
What risks do independent contractors pose to companies?
Employers may have to pay fines and penalties.
There are many benefits of hiring independent contractors rather than employing employees but when doing so companies put themselves at financial risk, often companies have employees who they classify as independent contractors to avoid certain business taxes or allow independent contractor taxes to be filed by the independent contractor themselves.
Sometimes companies may even do this without the employee knowing that they are not on a permanent contract basis but hired as an independent contractor they may only find out when the contract is terminated and they are not entitled to any insurance benefits.
How do avoid these risks?
Control
If you want to avoid getting into trouble with the PSB you need to take control of your workers, you must mention in your contract with them whether or not they will be working under your direct supervision and this would be enough to create a distinction.
Bringing their own tools
If a company requires that the worker brings their own tools and equipment and buys their own software they are likely hiring an independent contractor rather than an employee, most large-scale companies have their own equipment and will not necessarily require employees to bring them. If you are required to bring your own tools it is likely to be a distinction that you are being hired on an independent contractual basis.
Risk of loss
If it can be shown that by delivering a service there may be a financial risk then you are an independent contractor and not an employee, an employee will not be expected to incur an expense whilst offering a service to the company. These expenses can include: using your own car or using your cell phone for work purposes. These are all expenses that will be reimbursed by the employee and help create a distinction between independent contractors and permanent employees.
An ability to earn a profit
If there is an ability to earn a profit other than your wage you should ensure that this is put into your employer-employee contract, this should be clearly stated, the clause should mention that if a certain milestone or certain target is met the person would be entitled to a reward or a share in the profit.
Financially independent
If a worker is working at more than one place and has several or more than one customer then they are considered to be independent contractors and they must clarify this to create a distinction and avoid risks.
Bottom Line
Independent contractors are common in Canada, independent contractor taxes are comparatively more favorable and small businesses do prefer working with them but there are still risks involved with working with such workers, this happens in particular when the employee classifies their workers as independent contractors solely to reduce their costs and their obligations.
If you are looking for a professional Tax Accountant who can lead you through the process of claiming business expenses on your tax return, then feel free to reach out to Filing Taxes at 416-479-8532. Schedule your tax preparation appointment with us and take the first step towards proper management of your finances. Our professional personal tax accountants will make sure to get you the maximum tax refund on your personal tax return.
Frequently Asked Questions
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Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.