Employee vs. Independent Contractor

1) Economic Reality or Entrepreneur Test   
  • Control – over factors such as hours worked, location in which the work is performed, what and how the job is to be completed
  • Ownership of tools – who owns the tools used to complete the work?
  • Chance of profit and risk of loss – does the person need to cover expenses; break even etc.
2) Integration or Organization Test
  • The integration or organization test examines whether the tasks performed by an individual form an integral part of the business (i.e. an employer-employee relationship exists) as opposed to merely being accessory to the business (i.e. the individual is an independent contractor).
  • The test will also determine whether the individual is in business in his or her own right and provides services to another business as an independent contractor.
  • The argument here is that a business will not hire a contractor to be a person who is integral to the company; for instance, a company’s senior managers will likely not be contractors.
3) Specific results test
  • is the individual providing services for a specified period of time to accomplish a particular result (design the new IT system for the company) or on an ongoing basis (internal IT help desk)?

Facts of these tests need to be considered together; therefore, no single test is decisive in establishing employee vs. independent contractor.

Tax Implications of Employee vs. Independent Contractor

Advantages of Independent Contractor Status

  • Independent contractors are treated like businesses; therefore, they get more deductions (CCA, rent, interest on loans).
  • Source deductions are mandatory for employees, T4’s must be filed for employees; while independent contractors do not need to pay withholding tax (remember they may still be required to make installments).
  • No requirement to make EI payments.
  • Disadvantages of Independent Contractor Status.
  • May need to collect and remit HST and file HST Returns.
  • Need to pay double CPP (employee and employer portion).
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