Are They Employees or Contractors?

One of the more frequent discussions we have with clients is whether someone in their office qualifies as an employee or contractor.

For most small businesses, saving money is the big concern. The possibility of having contractors instead of employees as a way to save money - by not paying CPP, EI and so on - seems like an appealing option.

The trouble is that most employees are just that - employees. They do not meet the definition of contractor and by paying them as contractors, you risk serious consequences.

Ask yourself the following questions about each person affiliated with your business:

1. Does she work in your office?

2. Does he use your tools and equipment?

3. Does she work under your supervision?

4. Does he have business cards with your company name and information?

5. Does she have company e-mail or voice mail?

If you have answered yes to one or more of the questions, chances are good the person is an employee in the eyes of Revenue Canada. It doesn't matter if someone has registered a GST number in order to be treated as a contractor. It also doesn't matter if people just work for you part-time - that just makes them part-time employees.

The penalties for not withholding the proper payroll deductions for an employee are stiff. They can include all of the past deductions you should have withheld, plus interest and penalties. Consider the financial impact this would have should you be caught. In many cases, the back taxes and penalties can bankrupt a small business.

Get off on the right foot. If your business can't sustain the real cost of an employee (i.e., the proper tax deductions), maybe you can't afford to have the employee. If you don't acknowledge your true costs, you will never know if your business is actually viable. And if it's not, it's best to know before the government steps in.

For more information about employees and contractors, visit the Government of Canada website at http://www.cra-arc.gc.ca/tax/business

Fern Gordon is the Managing Partner of The Profit Line which specializes in small business bookkeeping and financial management. We believe that it is critical for every business, large or small, to know where they stand on a monthly basis. Do you know where your business stands?

To get your payroll in order, visit: http://www.theprofitline.com/ or call 416.861.8177 and ask for Fern Gordon.