Are they a Subcontractor or an Employee?
It seems that in today’s economy more and more people are being asked to perform work as a sub-contractor, or are asking to be paid as a subcontractor, rather than as an employee. In some cases, this can be an advantage to both parties of the agreement; the business owner reduces the tax burden of the company by avoiding the employer portion of the CPP and EI, and the worker has the opportunity to “write-off” certain expenses against their income. Win-Win, right? Unfortunately, there is a lot more to the situation than first meets the eye, and the highest risk is actually the employer’s.
Part of our job at Open Road Accounting and payroll Solutions is to assist our clients when they are being audited by CRA. We are often the first contact with CRA, providing them with the information from the accounting system that is required to perform the audit (and ONLY that specific information). As we are the first line contacts, we do our very best to ensure all our clients fully understand how this issue might affect them. What we have noticed, is that employers often do not understand the full impact of being incorrect if someone they have been paying as a sub-contractor is determined to be an employee during an audit. When this happens, CRA reviews the dollar value paid to the sub-contractor during the audit period, as well as vacation pay, overtime calculations, severance pay requirements, etc. then determines how much CPP, EI and Federal tax should have been remitted to CRA. The Employer is then required to remit the full amount, plus penalties and interest. Yes, you read that right, the employer is responsible for remitting all the remittances that should have been sent in PLUS penalties and interest. Savings? What Savings? That “employee” has now cost you significantly more than if you had included him/her on your payroll to begin with. In addition, CRA has now “caught” you on something. They may expand your audit in both breadth and depth. They may flag your file for another audit next year, the payroll department may nudge the GST department, and suddenly that section is auditing you too…..
As a business owner, you need to educate yourself about the difference between a sub-contractor and an employee in order to protect yourself from a potentially disastrous situation. A good place to start is the Employment Standards Branch fact sheet on the subject. See the link below for more information.
Employment Standards Fact Sheet for Employee versus Contractor