Employee or Self-Employed

The question of whether a worker is an employee or self-employed is important to be answered both for the worker and for the payer.

If a worker is classified as an employee, the payer becomes classified as his or her employer and  is required to deduct income tax, EI and CPP from the pay of the employee. Labour laws also specify certain minimum conditions of employment that the employer must meet.

In preparing his or her income tax, the employee has a restricted list of employment expenses that may be eligible for deduction from the employment income if the employer certifies that the employee is required under the conditions of employment to incur those expenses.

If the worker is classified as a self-employed subcontractor, then the payer becomes classified as a customer of the subcontractor.  The customer is required to pay the invoice of the subcontractor. It is the subcontractor’s responsibility to determine if he or she should be registered for GST/HST and charge it to the customer. In preparing his or her income tax, the subcontractor has a much wider range of business expenses that may be deducted from business revenue and there is no need for certification from the customer that the expenses were part of the conditions of doing the work.

There is a problem if a worker has been classified incorrectly. If a worker is really an employee but has been classified as a subcontractor, then CRA can assess and penalize the employer for failing to deduct the required CPP and EI. The worker may have deducted expenses that, while allowed as a business expense, are not allowable employment expenses. Such expenses can be disallowed causing a reassessment of the employee.

It is important to properly classify a worker as an employee or as self-employed. CRA has an excellent guide called RC4110: Employee or Self-Employed which gives guidance on how to determine a worker’s classification. The guide can be found on CRA’s website at http://www.cra-arc.gc.ca/E/pub/tg/rc4110/README.html

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