Employee or Contractor?

Considering becoming a self-employed independent contractor? Learn the pros and cons.

People who are self-employed can generally claim a wider range of deductions against business income than employees. One difference is how Canada Pension Plan (CPP) and Employment Insurance (EI) apply:

• EI: In many cases, self-employed individuals do not pay EI premiums on self-employment income under the same rules as employees (optional EI for self-employed may be available —see current CRA guidance). If you do not participate, you may not qualify for regular EI benefits if your work stops; weigh that trade-off.
• CPP: Self-employed individuals pay both the employee and employer portions of CPP on net self-employment income (subject to annual maximum pensionable earnings and rates set each year by CRA). You can deduct the employer-equivalent portion within limits; you receive a credit for the employee portion. Verify the current year’s rates and ceilings on Canada.ca – CPP contribution rates, maximums and exemptions.

The distinction between an employee and an independent contractor is a question of fact. The CRA looks at indicators such as control, ownership of tools, chance of profit and risk of loss, and integration into the payer’s business. Labels in a contract do not override the facts.

You are more likely to be treated as an independent contractor if, for example:

• You agree on results but control how and when the work is done (within reason);
• You use your own tools and equipment;
• You invoice for services and are not on payroll with regular deductions;
• You can profit or lose from the work.

You may be an employee if the payer controls how, when, and where you work, pays you regularly with tax withholdings, and integrates you into their organization like other employees.

Getting it wrong can lead to reassessments, interest, and penalties. If you are unsure, speak with a qualified advisor

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This post has been prepared for general information purposes. It is not advice. The information presented may not fit your unique situation. Please consult one of our trusted business advisors at RHN CPA for further clarification and interpretation of your circumstances.