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May 08, 2022 May 08, 2022/ The difference between a contractor and an employee is a crucial issue for an employer, because paying employees is generally more expensive. The extra expense arises because the employer must pay payroll taxes for employees, but does not do so for contractors. There is a tendency for employers to classify as many people as possible as contractors, so that the employers are not liable for payroll taxes. However, if the government concludes that an employer should have defined someone as an employee, then it is still liable for these taxes after the fact. Thus, if there is not a clear case for treating a person one way or the other, it is generally safer to classify the person as an employee than as a contractor. The comparison between a contractor and an employee centers on the relative independence of the positions. There is no single test item that clearly shows a person to be an employee or a contractor. Rather, one should make the decision based on the sum total of all of the following factors. If you are still uncertain, then document the situation in a Form SS-8 and submit it to the IRS for an opinion. Definition of a ContractorA contractor can create a deliverable for a company in any manner that he or she chooses. A contractor does not receive any benefits that a company would normally pay to its employees, and is not paid any overtime. Compensation may be on an hourly basis, or as a fixed fee in exchange for a predetermined deliverable; thus, the type of compensation is not the determining factor when deciding whether a person is a contractor. A contractor is paid through the accounts payable system, rather than through payroll. This means that the company is responsible for issuing a Form 1099 to the contractor immediately following the end of the calendar year, which states the total amount paid to the contractor during the calendar year. The contractor (not the company) is responsible for paying all payroll taxes to the government. A person is an employee if the company controls not only the person's work output, but also the manner in which the work is performed. The IRS uses the following three criteria to establish whether someone is an employee:
An employee is paid through the payroll system, which means that the company employing the person is responsible for the company's portion of any payroll taxes, for unemployment insurance, for withholding any applicable taxes from employee paychecks, and for remitting all taxes to the government. May 08, 2022/
“Employers are responsible for deducting Canada Pension Plan contributions, Employment Insurance premiums, and income tax from remuneration or other amounts they pay to their employees,” according to the Canadian Revenue Agency’s (CRA) online guide RC4110, Employee or Self-Employed? Of course, the crucial issue is whether or not the people doing work for you are employees or self-employed contractors. This is not clear cut. According to CRA, the intent you had going into your relationship and the degree of control you have over the person are important factors in determining whether you have an employer-employee or a business relationship. Factors differ if the work relationship is in Quebec. Differences between employee and independent contractors
Questions to ask to determine a person’s employment statusHere are questions you can ask to help you determine whether someone is an employee or an independent contractor.
CRA will review workers’ statusConsult the CRA’s guide for more information. It states that if a worker or a payer/employer is not sure of the worker's employment status, either party can request a CRA ruling to have the status determined. |