Employees and Contractors: The Beginners Guide!

An employee works under the company, and a contractor runs their own business.

Feb. 24, 2022

Dreading telling the difference between an employer and a contractor? Have no fear! Yogi & Associates are here to clarify as much as they can to clear the concepts.

An employer is subjected to more limitations but is compensated consistently. On the other hand, a contractor is independent and free to work while taking financial risks. It's challenging to decide which one is better because it all depends on how you choose to work, what capabilities you have, and what opportunities are available.

Who Is An Employee?

Employees work in a company under a supervisor or do their assigned tasks by the manager.

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“Always treat your employees exactly as you want them to treat your best customers.” - Stephen R. Covey

Who Is A Contractor?

The contractor is connected with his clients, completes his work projects, agrees to offer specific products and services defined in a contract, and does not usually work at the employer's location.

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Independent contractors - a rapidly growing piece of the workforce - can often achieve the best quality of life. They can choose from where they work, whom they work for and for how long. (Maynard Webb)

Six Differences between an Employer and a Contractor:

Employees:

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  1. Employees get the Employment Standards Act (ESA) benefits, which includes overtime pay and paid holiday benefits, etc.
  2. Employees are supposed to give their full-time attention to their employers; they are not allowed to have a second job or side business in some cases.
  3. Employer's earnings are liable to deductions from their pay for Canada Pension Plan (CPP), Employment Insurance (EI), and Income Tax.
  4. Employees are provided all the facilities they need to perform the job, i-e, the required tools, and equipment.
  5. An employee's earnings don't depend on the company's profit or loss; like an employee doesn't earn more if his company gained more profit, his salary is fixed.
  6. Employees cannot hire someone else to do their work tasks and are not allowed to perform their work however they like.

Contactors:

  1. Contractors cannot get (ESA) benefits.
  2. They are not restricted to one client only. They can have multiple customers at one time.
  3. They have to bring their tools and equipment to perform their tasks.
  4. Their income depends on the business they are running. If the company is not making profits, it affects his earnings.
  5. They can do their work according to how they want to as long as they follow appropriate rules and regulations.
  6. They are self-employed, which means they can deduct expenses from their earnings on their tax return.

Pros and Cons of Hiring Employees and Contractors:

Pros of Hiring an Employee:

  1. As a business owner, if you hire an employee, you can guide him in your management techniques, and the work will be done according to your planning.
  2. You can set the work hours and his way your employee will give proper time and attention to complete the work you assigned for him.
  3. You can easily maintain a good relationship with your employee because of the control factor and the proper time spent completing the work task.

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“This is the only country in the world where today’s employee is tomorrow’s employer.” - Marco Rubio

Cons of Hiring an Employee:

  1. As a business owner, a proper management system is required to properly manage employees, which means more management staff is needed and more expense.
  2. You have paid fixed salaries plus other benefits like healthcare, pensions, and paid leaves if you hire an employee.

Pros of Hiring Contractors:

  1. Employees don't need to spend on tools, resources, or equipment. The contractors bring their instruments and equipment. They manage these things on their own.
  2. The contractors pay their taxes on their own.
  3. The contractors work on their own without supervision. They manage the work task by themselves.
  4. The contractor and his client can also cancel the agreement if they want to, depending on the contract terms.
  5. Depending on the client's needs, the connection can grow. Contractors can also make more than on contracts with clients, making their relationship grow.

Cons of Hiring Contractors:

  1. Clients cannot deduct any of those costs from their corporate tax bills.
  2. If the market favors contractors due to supply and demand, it would be more expensive to hire contractors than hire an employee.
  3. Contractors are not available according to your convenience. They won't even take time for you as they work with multiple clients at one time.
  4. Contractors usually do not complete their work on your timeline. Instead, they set their period.

What Are The Tax Benefits Of Hiring An Employee Or A Contractor?

Tax Benefits of Hiring an Employee:

  1. The Canada Employment Credit allows the employee to offset a part of employment expenditures.
  2. An employer can claim up to $2,000 per year under The Apprenticeship Job Creation Tax Credit (AJCTC) for a "Qualifying Apprentice."
  3. Various tax benefits are available depending on your province or region to encourage hiring students, older workers, and young individuals.

Tax Benefits of Hiring a Contractor:

There are no tax-saving benefits for hiring a contractor, but you are relieved of paying and managing all the taxes as contractors pay the taxes themselves. Therefore, many businesses find hiring contractors is a more feasible option as long as the proper employer-contractor relationship is maintained.

Wrapping it up!

Employees and contractors both have merits and demerits. You can select an employee or a contractor for a particular project by figuring out the requirements of this specific project. Whether you are dealing with an employee or a contractor, it is essential to keep them safe and make sure the work is running smoothly, and this is how your company remains productive and successful. If you're still confused about understanding this concept, contact Yogi & Associates. Our team is here to help you know the difference between an employee and a contractor. We will assist you in learning more about their characteristics and the duties they perform at work. Employer Guide

Rafia Khalil

Executive Journalist

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