Difference Between Hiring a Contractor Or an Employee
Posted On: 14/10/21 - 0

For many entrepreneurs, it can be confusing. What’s the best way to go? What is the difference between hiring a contractor or an employee? We have tried to drill this topic down so you can make an informed decision based on what is best for your business, and the new hire.

Contractor Versus Employee

An individual is an employee if the employer and the worker have an employment contract. Employers hire employees for a specific type of work.  In our office we start the relationship with a written job offer. We also provide a detailed job description that both parties agree on. We also get a signed document on the understanding of the expectations of the role as well as agreed terms with respect to compensation and benefits. The CRA considers you to be an employer if you:

  • pay salaries, wages, bonuses or tips to your employees
  • provide certain taxable benefits to your employees

A contractor uses a contract for service, meaning that you as the “customer” control the outcome, timing and expectations of the work. With a contractor, you must accept that someone else might do some of the work. Some of our client’s have worked for companies that  have requested  employees to work as contractors so those same businesses can reduce their overall costs and liability. In some cases, people find themselves accepting what seems like a full-time job, but it truly is a contractor position.

Advantages of Hiring Employees

Hiring an employee has many advantages.  Employees are often more engaged and motivated to work hard and achieve your company’s goals. Offering competitive salaries and benefits really motivate this type of outcome in your business.  In our business we view employees as long-term investments. We spend money on training them and developing their skill sets, expecting that they will continually be challenged and enjoy their roles that much more.  Everyone reaps the benefits. Employees understand the internal workings of your company. They are also more likely to remain loyal to the business versus a contractor. 

A contractor might only care about getting the project done and getting paid, a long-term employee may be more willing to exceed expectations, especially if there are stretch goal benefits/compensation.

When you hire employees, you have a reliable, consistent team to work on projects as needed. You don’t have to constantly negotiate contracts with new talent and wonder if they are capable of completing the tasks you hired them for.

Advantages of Hiring Contractors

There are benefits to hiring a contractor.  Both financially and operationally speaking. Contractors come with a lot less paperwork and responsibility.  Your company is not responsible for remitting their payroll taxes, including income taxes, C.P.P. contributions, E.I. premiums, and other benefits, including pensions and life insurance. By hiring  a seasonal contractor, you don’t have to worry about meeting payroll when there’s no work coming in. You hire them as needed.

For the contractor, the main benefit would be the potential for tax deductions that are not available to employees.  A self-employed person can deduct all reasonable business expenses. To be considered reasonable by the CRA. It’s best to check with an accountant to figure out whether a business expense you want to claim as a deduction is considered “reasonable” or not.

Because of the different tax implications for subcontractor vs. employee, the CRA is careful in differentiating between them and you need to be too. Your business should report all payments made to the contractor on a T4A slip. In order to protect yourself and your business it’s important to have the relationship between your company and a contractor to be clearly documented in a written contract.

Hiring Contractor or Employee?

Contractors can work extremely well in industries where specific skills are in high demand. These self-employed workers often charge more per hour than an employee, but, being self employed lacks many of the benefits of an employee including job security, benefits, liability and stress due to uncertainty of when the next contract position will come up.

When growing a small business, be sure to completely understand the difference of hiring a contractor vs. employee.  If you are still unsure, call our office and have this discussion with our accountant.

For some businesses, a hybrid approach is best, hiring employees for recurring tasks and contractors for occasional projects.

For more detailed information, you can call our office, or contact the CRA directly for guidance.

12203-107 Avenue.
Edmonton, Alberta.
T5M 1Y9

Call us:
780.482.7297