This is probably one of the most popular questions we get asked by our clients. We will look at the pros and cons for each option and also explain the CRA’s rules around this issue.
Hiring subcontractors are quite common for businesses especially for their specialized skills or for seasonal/short term work. Nowadays, many large companies are even turning their employees to subcontractors. From the accounting and tax point of view, there are 3 key benefits for hiring subcontractors and a couple of reasons against it.
Pros of Hiring Subcontractors
There are fewer/lower add-on costs for subcontractors
Many business owners prefer subcontractors to employees because employment costs are much higher. An employer is required by law to make payments to the Canada Pension Plan (CPP), Employment Insurance (EI) and to provide holiday and vacation pay:
- In 2023, the maximum CPP contribution for an employee is $3,754.45 and the maximum EI contribution is $1,403.43. The combined cost for CPP and EI is $5,157.88 for an employee who earns $66,500 a year.
- In Alberta, there are 9 general holidays and 4 optional holidays. Employers are required by law to pay employees for a statutory holiday if the holiday falls on their regular working day. For an employee who earns $66,500 a year, and if the employer only observes the 9 general holidays and none of the optional holidays, the annual cost of holiday pay is $2,301.
- Vacation pay. Employers are required to pay employees vacation pay or paid time off. In the first year of employment, no vacation pay is required with an exception for construction workers. From the 2nd year to the 5th year of employment, the minimum paid vacation is 2 weeks or 4% of the yearly wages. Above 5 years of employment, the minimum paid vacation is 3 weeks or 6% of the annual wages. Hence for an employee who earns $66,500 a year and who has been working for the employer for 3 years, the vacation pay is $2,660.
The cost of CPP, EI, holiday pay and vacation pay is over $10,118.88 for an employee who earns $66,500 annually. That amounts to 15% of their annual salary! Unfortunately, it does not stop there. For certain industries, the employer is also required by law to pay Workers Compensation Plan (WCB) for their employees and this cost varies depending on the industry. Many employers also provide various extended health benefit, life insurance and disability insurance coverage to employees. This is optional and the costs also vary depending on the plans the employers provide but it can easily exceed a few thousand dollars per employee per year.
There is less paperwork and less compliance from Canada Revenue Agency for subcontractors than employees
If you hire an employee, there is payroll remittance to be submitted to CRA on a monthly or quarterly basis depending on the type of remitter you are. This is one of the areas that CRA imposes sever penalty and interest for late or missed payments. The employer is also responsible for preparing T4 slips within 2 months after the calendar year ends. Again, there is a late filing penalty if the employer misses the filing deadline. On the other hand, if a subcontractor is hired, the paperwork to comply is much less. No monthly or quarterly payroll remittance to CRA is required. However if the subcontractor is a GST registrant, GST needs to be paid to the subcontractors. Also, depending on the industry, T5018 Statement of Contract Payments Slips are required for all construction contractors. For a full list of industries that require T5018, please click here. Certain types of services may require T4A slips to be prepared. Please click here for the services that require a T4A slip.
Subcontractors are normally already trained up for the job so no additional training is required upon hiring
Subcontractors are expected to be trained for the job, and no minimum or additional training should be provided. On the other hand, the training cost for employees could be significant depending on their previous experience and how quick they can learn. This cannot be easily measured by a dollar amount.
Cons of Hiring Subcontractors
Business owners may find subcontractors less reliable
Subcontractors are individual businesses and they might have other jobs in addition to the job they have been subcontracted. At times when your customer has an urgent job and need your help, and your subcontractor is not able to commit, you may not only risk losing this job but also the trust from your customer(s). To establish a long-term successful business, one key element is to provide great services consistently. It means business owners need to have a reliable work force to get the job done, and this makes hiring subcontractors less favorable.
Business owners have more control over employees than subcontractors
Independent contractors normally have their own way of doing things or working on their own schedule and this may not meet your requirements. Also even though they might be trained, their level of standard may be different from yours. This can make contractors less favorable.
What is the CRA’s standard for Subcontractor vs Employees
To determine if an individual is an employee or subcontractor, the key question is “whether the person is engaged to carry out service as a person in business on their own account, or as an employee”.
CRA takes a two step approach:
The CRA asks the payer and the worker what their intent was when they entered into the working arrangement. The CRA will review the terms of the contract and examine whether the working relationship is a contract of service (employer-employee relationship) or a contract for service (business relationship). If it is hard to determine that based on the contract, Step 2 will be taken.
The CRA asks the payer and the worker a series of questions that will help them to determine the working relations. The main questions are:
- What is the level of control the payer has over the worker’s activities? Basically, this question looks at who has control in deciding how the job is done and when the job is done.
- Who provides tools and equipment for the job? When the payer supplies most of the tools and equipment and the payer is responsible for repair, maintenance and insurance costs, the work relationship is very likely to be determined as an employment relation.
- Who takes on the financial risk of the job? An independent subcontractor assumes the risk of not completing a job on time, or the risk of redoing the job due to not meeting the requirement. Employees rarely facie any of the financial risks directly.
If the CRA determines that a worker is an employee and not a subcontractor, the employer/payer will be required to pay all the CPP and EI.
It is often difficult to determine whether a worker is an employee or a subcontractor.
Please contact our office for details.
Hiring employees may incur more paper work to comply with the law and government and additional costs such as holiday and vacation pay and training than hiring subcontractors may. However employees are considered more reliable and it is easier to control their schedule and quality. It is a good idea to hire subcontractors for specialized or short term/temporary work. In the long run, it is better to hire employees and train them well so that you will be able to provide consistent, reliable and a high quality service to your customers which is crucial for your business’ long term success.