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Contract vs. Payroll Employee

“I have a small business. When I hire a new employee, are there any benefits to having them on contract vs having them on payroll?”


Job description and classification as an “employee” or “independent contractor” is extremely important to both the owner of the business and the person working there.

As an employee, the employer will have to deduct CPP and Unemployment Insurance, as well as income tax from each paycheck. The expenses associated with these deductions and remittances are those of the employer.

As an employee, the individual might also participate in a healthcare and or pension plan supported by the employer to enhance its job prospects with additional benefits. As an employee, these perks and plans are an enhancement to their employment agreement and income. The employee will also pay tax on the benefits received.

On the other hand, as an independent contractor working for a company , the contractor gets to write off a portion of automobile, entertainment, auto gas and maintenance and office “ rent” expenses even if their office is in their home. These deductions are not available to employees.

These additional deductions from income by the contractor are also perks in the hands of the contractor and less trouble in the hands of the Company the contractor is working for, as there are no deductions to be remitted.

One must balance which is the best business arrangement for both parties under the circumstances.
Please be aware that you cannot just say you’re an independent contractor. CRA, during an audit , would be looking to see how many other customers you might have as a contractor. If you happen to be full-time at one company with no other customers, the CRA will deem that you are an employee and subject to all of those deductions referred to above, together with interest and penalties. Just being paid by the hour does not automatically classify a worker as an employee.

In most cases it is clear what the individual should be classified as; however, one should be aware of the distinction and see what classification might apply in their particular case.

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