Hiring an employee vs a contractor

There are two separate questions hiding in this decision, and mixing them up is what gets businesses into trouble. The first is which arrangement suits the work — a genuine business judgment about permanence, control and risk. The second is which arrangement the law considers this to be, which is not up to you and is decided on the facts. This page is about the first question. If you want the second, the CRA classification test is set out in full elsewhere on this site, and it is worth reading in parallel.

The important asymmetry to understand before you start: getting the label wrong is overwhelmingly the payer’s problem. If a worker treated as a contractor is later found to have been an employee, it is the business that can be looked to for the deductions that should have been withheld and the employer contributions that should have been paid, together with interest and penalties — often long after the engagement ended and the worker has moved on.

What hiring an employee commits you to

An employee is an ongoing administrative relationship, not just a payment. Before the first pay run you need a payroll account with CRA, and from then on you are withholding income tax, CPP and EI from every payment, adding the employer’s share, and remitting the total on a fixed schedule — a schedule that does not move because a client paid you late. Amounts withheld are held in trust, which is why lateness there is treated more seriously than an ordinary balance owing. The RP account guide covers the mechanics.

Beyond CRA, employment brings obligations that vary by province: minimum standards for hours, overtime, statutory holidays, vacation pay and notice on termination, plus workers’ compensation coverage. In British Columbia there is also a provincial employer health tax once payroll passes a threshold. At year end, T4 slips are due by the last day of February, on the calendar year rather than your fiscal year.

None of that is a reason not to hire. It is a reason to know that the commitment is a standing process rather than a transaction, and to price it accordingly. See what running payroll involves if the administration is the part you would rather not own.

What engaging a contractor commits you to

Much less, administratively. A contractor invoices, you pay, and there are no deductions to withhold or employer contributions to add. There is no vacation entitlement, no notice period beyond whatever the contract says, and no payroll account required for that relationship. If your business is in construction, payments to subcontractors carry their own reporting obligation — see T5018 reporting.

What you take on instead is risk and a constraint on control. The constraint is real and often overlooked: a genuine contractor decides how the work is done, supplies their own tools, can subcontract, works for others, and carries the possibility of profit and loss. The moment you set their hours, direct their methods, supply everything they use and make them exclusive, the arrangement starts to look like employment regardless of what the contract says. You cannot have the administrative simplicity of a contractor and the operational control of an employee.

Comparing the true cost, not the headline rate

Owners routinely compare an hourly wage against a contractor rate and conclude the contractor is expensive. That comparison is not like for like. The cost of an employee is the wage plus the employer portions of CPP and EI, plus vacation pay, plus workers’ compensation premiums, plus any provincial payroll tax, plus benefits if offered, plus the recurring administrative time. A contractor’s rate has all of the equivalent costs already built into it, because they are carrying them.

The honest comparison is fully loaded employment cost against the contractor rate, over the period you actually need the work done. Run your own numbers with the payroll deduction calculator rather than estimating — the gap is usually smaller than expected, which shifts the decision back where it belongs, onto the nature of the work.

Choosing on the work, not the paperwork

A short set of questions usually settles it. Is the work ongoing and central to what the business does, or is it a defined project with an end? Do you need to control how and when it is done, or only what is delivered? Will this person work for others at the same time? Who supplies the tools and bears the cost of redoing poor work? Is there a real possibility of them profiting from doing the job efficiently?

Answers clustering on the first side of each pair point to employment; the second side points to a contractor. Answers that split are the signal to get advice before making the offer rather than after, because the arrangement is easiest to structure correctly at the start and expensive to unwind later.

Getting it right operationally

If you hire an employee: open the payroll account before the first pay date, set up deductions and remittances on the schedule CRA assigns, keep records of hours and vacation, and diarise the slip deadline. The payroll hub gathers the guides for each of those steps.

If you engage a contractor: put a written agreement in place describing the deliverable rather than the hours, let them use their own tools and their own methods, do not make them exclusive if you can avoid it, keep their invoices, and do not fold them into internal processes designed for staff. A contract alone will not fix a relationship that operates like employment, but a contract that matches how the work is genuinely done is strong support when the facts back it up.

A final note for incorporated contractors you engage: incorporation does not settle the question either. Where one person’s corporation provides services that look like employment to a single client, personal services business rules can apply on their side, and it is a factor worth both parties understanding before the engagement starts.