Hiring an employee vs a contractor

This decision hides two separate questions, and mixing them up causes trouble. The first is which arrangement suits the work, a business judgment about permanence, control and risk. The second is which arrangement the law considers this to be, which is decided on the facts, not by you. This page covers the first. For the second, read the CRA classification test alongside it.

One asymmetry first: getting the label wrong is mostly the payer’s problem. If a contractor is later found to be an employee, the business can be pursued for the deductions it should have withheld and the employer contributions it should have paid, plus interest and penalties. That bill often arrives long after the worker has moved on.

What hiring an employee commits you to

An employee is an ongoing commitment. Open a payroll account with CRA before the first pay run, then withhold income tax, CPP and EI from every payment, add the employer share, and remit on a fixed schedule, even if a client pays late. Withheld amounts are held in trust, so lateness is treated more seriously than an ordinary balance owing. See the RP account guide.

Employment also brings provincial rules on hours, overtime, statutory holidays, vacation pay and termination notice, plus workers’ compensation. British Columbia adds an employer health tax once payroll passes a threshold. T4 slips are due by the last day of February, for the calendar year, not your fiscal year.

That is no reason not to hire, but it is a standing process, not a transaction, so price it accordingly. If you would rather not own the administration, see what running payroll involves.

What engaging a contractor commits you to

Much less. A contractor invoices and you pay: no withholding, no employer contributions, no vacation entitlement, no notice beyond the contract, no payroll account. In construction, subcontractor payments carry their own reporting; see T5018 reporting.

Instead you take on risk and a limit on control. A genuine contractor decides how the work is done, supplies their own tools, can subcontract, works for others, and can profit or lose. Once you set their hours, direct their methods, supply everything and make them exclusive, it looks like employment whatever the contract says. You cannot have contractor simplicity with employee control.

Comparing the true cost, not the headline rate

Owners often compare an hourly wage with a contractor rate and conclude the contractor is expensive. That is not like for like. An employee costs the wage plus employer CPP and EI, vacation pay, workers’ compensation, any provincial payroll tax, any benefits, and recurring administration. A contractor’s rate already includes the equivalent costs. If the answer is employee, the payroll account and first remittance follow quickly; see taking on your first employee.

Compare fully loaded employment cost with the contractor rate over the period you need the work, using the payroll deduction calculator. The gap is usually smaller than expected, which returns the decision to the nature of the work.

Choosing on the work, not the paperwork

A few questions usually settle it. Is the work ongoing and central, or a project with an end? Must you control how and when it is done, or only the result? Will they work for others? Who supplies tools and pays to redo poor work? Can they profit by working efficiently?

Answers on the first side point to employment, the second to a contractor. Split answers mean get advice before the offer: the arrangement is easy to structure at the start and expensive to unwind later.

Getting it right operationally

Hiring an employee: open the payroll account before the first pay date, remit on schedule, keep hours and vacation records, and diarise the slip deadline. The payroll hub has a guide for each step.

If you engage a contractor: sign a written agreement describing the deliverable rather than the hours, let them use their own tools and methods, avoid exclusivity where you can, keep their invoices, and keep them out of staff processes. A contract will not fix a relationship that operates like employment, but one that matches how the work is done is strong support.

Incorporation does not settle the question either. Where one person’s corporation provides employment-like services to a single client, personal services business rules can apply on their side, and both parties should understand that before the engagement starts.

If the assessment puts you in the middle or high band, the next step is a written review of your actual arrangement. See a written PSB risk review.