Sometimes it is difficult to determine if an individual is an independent contractor (i.e. self-employed) or an employee. Many employers find it beneficial to hire contractors rather than employees. The costs of EI, CPP, and benefit packages for employer are reduced.
Issues- Employee vs self-employed
- The deductible of expenses is more restricted for employees. Self-employed individuals may be allowed to deduct reasonable expenses.
- Self-employed need to pay double CPP; no EI (can opt into EI system for certain benefits);
- GST/HST input tax credits are available for self-employed.
- Employer must withhold source deductions (income tax, EI, and CPP) and remit to CRA;
- Employer must make match CPP contribution and 1.4 times of EI deductions and remit to CRA;
- Employer must file T4 summary and supplementary slips by end of February.
There is no single test or factor that is decisive in determining whether an individual is an employee or an independent contractor.
- Economic reality or entrepreneur test- control ( hours, location, what and how the job is to be completed), ownership of tools, chance of profit and risk of loss
- Integration or organization test- whether individual is economically dependent on the organization
- Specific result test- is the person providing services for a specified period of time or on an ongoing basis?
One client had child care expenses and claimed it in the year of tax return. However, the situation was the babysitter who came to client’s home and took care of child. When CRA audited it, the factors for the economic reality or entrepreneur test involved the employer and employee relationship. So the client as employer must withhold source deductions and also need contribute employer’s portion of CPP and EI and remitted to CRA. The client fail to compliance with the rules and got the penalties and interest charged.