Employees and Contractors: The Beginners Guide!

by | Jun 2, 2022

Dreading telling the difference between an employer and a contractor? Have no fear! As Yogi & Associates are here to clarify as much as they can to clear the concepts. In the construction industry, there are a lot of terms that we hear and use a lot. Moreover, we know some terms refer to larger companies and others refer to more independent contractors. So, understanding the differences between contractors and employers can be tricky because each of these groups has different roles and responsibilities. So, here’s what you need to know if you’re trying to decide which type of contract you want!

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. But, 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.

Remember that the difference between an employee and a contractor is important for both the employer and the employee. And it will factor into your tax liability, benefits, retirement options, and other legal considerations as well.

1. Who Is An Employee?

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

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

2. Who Is A Contractor?

The contractor is connected with his clients, who, complete his work projects and agree to offer specific products. Furthermore, the contractor performs the services defined in a contract and does not usually work at the employer’s location.

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)

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3. Six Differences between an Employer and a Contractor:

Employees Contractors

Employment Standards Act (ESA):

Employees get the Employment Standards Act (ESA) benefits, which include overtime pay and paid holiday benefits, etc.

Employment Standards Act (ESA):

Contractors cannot get (ESA) benefits.

Time limit:

Employees are supposed to give their full-time attention to their employers as they are not allowed to have a second job or side business in some cases.

Time limit:

They are not restricted to one client only. So, they can have multiple customers at one time.

Earnings:

Employer’s earnings are liable to deductions from their pay for Canada Pension Plan (CPP), Employment Insurance (EI), and Income Tax.

Earnings:

They have to bring their tools and equipment to perform their tasks.

Facilities:

Employees are provided all the facilities they need to perform the job, i-e, the required tools, and equipment.

Facilities:

Their income depends on the business they are running. So, if the company is not making profits, it affects its earnings.

Rules & Regulations:

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.

 

Rules & Regulations:

They can do their work according to how they want to as long as they follow appropriate rules and regulations.

Independence:

Employees cannot hire someone else to do their work tasks and are not allowed to perform their work however they like.

Independence:

They are self-employed, which means they can deduct expenses from their earnings on their tax return.

4. Pros and Cons of Hiring Employees:

Pros of Hiring an Employee Cons of Hiring an Employee

Management:

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.

Management:

As a business owner, a proper management system is required to properly manage employees, which means more management staff is needed and more expense.

Time Limit:

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.

Time Limit:

You have paid fixed salaries plus other benefits like healthcare, pensions, and paid leaves if you hire an employee.

Pros and Cons of Hiring a Contractor:

Pros of Hiring a Contractor: Cons of Hiring a Contractor

Taxes:

The contractors pay their taxes on their own.

Taxes:

Clients cannot deduct any of those costs from their corporate tax bills.

Equipment:

Employees don’t need to spend on tools, resources, or equipment. So, the contractors bring their instruments and equipment. As they manage these things on their own.

Equipment:

If the market favors contractors due to supply and demand, it would be more expensive to hire contractors than hire an employee.

Time Limit:

The contractors work on their own without supervision as they manage the work task by themselves.

Time Limit:

Contractors are not available according to your convenience. So, they won’t even take time for you as they work with multiple clients at one time.

Work Nature:

Depending on the contract terms, the contractor and his client can also cancel the agreement if they want to.

Work Nature:

Contractors usually do not complete their work on your timeline. Instead, they set their period.

5. 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. So, 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. But, if you’re still confused about understanding this concept, contact Yogi & Associates as 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.