Some small businesses choose to pay their workers as consultants to save money on taxes, or cut down on the amount of administrative work that typically comes with payroll. While this may be an effective strategy in some circumstances, failure to carefully consider the CRAs criteria for determining whether a worker should be classed as a contractor or an employee, can result in your exposure.

If you work with payroll services in Langley, you likely don’t have to worry about this as they’ll steer you in the right direction, but it can still be helpful to know what factors the CRA use to determine the right classification:

• Control

To help determine the relationship of the worker, the CRA looks at the person in control of where the work takes place, when it takes place, and how. Even if the worker is able to select their own schedule and carry out their own work, it’s the role of the CRA to check who ultimately has control over the work. Even if an employer allows a worker to do their job unguided or unsupervised, it doesn’t necessarily mean that the worker has control over it.

• Ownership of equipment and tools

Do you, as the owner of the business, own whatever tools your workers use to fulfil their roles? If you do, that usually points to an employee relationship, as opposed to a contractor. However, if the worker owns the equipment they need to fulfil their role, this typically points to a contractor relationship, as if they were working for themselves independently, they wouldn’t be given the tools they need for their work by someone else.

• Chance of profit or risk

While an employee is paid a salary or commission (or both), when a worker is exposed to the rewards or risks of making a profit, this is much more suggestive of a contractor. If a worker has spent their own money trying to enhance their professional image, and invested in their role to gain clients or a particular contract for instance, this typically shows that should they not gain enough clients or the contract not work out, they are likely to incur a loss. Should their investment pay off on the other hand, they may generate a profit.

• Financial dependence on the organization

As an employee, a worker is usually financially dependent on the company they are working for, and if they’re earning 95% of their income from it, it’s safe to assume that they would be classed as an employee of that company. However, should the worker earn less than 25% of their total income from a company, and have a number of different contracts with several clients, they are more likely to be an employee in the eyes of the CRA as they’re not financially dependent on that one company.

• Intent of both parties

In the beginning of the contract between worker and company, was the intention of both parties to maintain an employment or business relationship? If the worker was offered vacation days and health benefits for instance, then this points towards an employee/employer relationship. How both parties initially began working together, will guide the CRA in their judgement of the relationship for tax purposes.

While both parties can work together in whatever way they choose, a tax accountant in Surrey, BC must help them ensure that the status they choose conforms to the reality of the relationship.

It’s important to remember that while the factors listed above are legitimate CRA criteria for determining whether a worker is classed as an employee or a contractor for tax purposes, subtleties and other criteria do exist. The best way to make sure you get it right while not paying more than you need to in taxes, is to work with a local tax accountant.