As a Start-up Employer, it is critical to know the importance of knowing the implication of incorrect classification of your workers.
Happy Sunday everyone!
Yesterday was my Dad’s 69th Birthday. We had a special gathering with most of the visitors coming from trade work fields. This blog is in response to their question “How are we going to classify our workers, self-employed or Employee?”
As a Start-up Employer, it is critical to know the importance of the implication of incorrect classification of your workers. For example, failing to withhold the required statutory deductions (EI, CPP…) for workers that have been incorrectly classified as self-employed, the Employer has to pay BOTH the employer and employee share for EI and CPP plus penalty and interest for not withholding on time.
Now, how we can identify workers’ status? For tax purposes, CRA uses the following factors to determine if the workers are self-employed or NOT.
Control- pertains to the ability of the employer to dictate the work being performed by the worker. If the payer takes sole control as to the final output and ways how to do it, then this working relationship falls under “Employee classification”
Tools & Equipment- Who has the ownership of the tools and equipment required to perform the job? If the worker supplies the tools/equipment required for the job and is responsible for the repairs and maintenance, then this is an indication that the worker is self-employed.
Financial Risk- What is the degree of financial risk? If the workers are susceptible to incurring losses or gaining profits which are dependent on the workers’ process being undertaken to finish the job, then this is more likely to be a self-employed arrangement. For example, if a job is quoted for 3 days and takes 1 week to complete the job for the same contract rate; the tendency is that the worker will most likely incur losses.
Subcontracting work or hiring assistants- If subcontracting work or hiring assistants is dependent on the sole prerogative of the worker, then this is a clear example of a self-employed individual. As a self-employed individual, subcontracting can affect their chance of profit or risk of loss.
Responsibility for Investment and Management- Is the worker required to have the working capital to perform the job? If yes, then a business relationship may exist.
Opportunity for profit and risk of Loss- Is the worker can negotiate the rate, accept or reject the job? If the worker has the freedom to choose/offer services to the various payers to maximize their bottom line, then that individual is normally to be classified as self-employed.
Disclosure: The above factors are based on general situations and are solely used by CRA to determine individuals’ tax obligations. These write-ups are for information purposes only and are not to be used without consulting the right professionals.
Need help to determine the classification of your workers based on your special situations? Reach us at: info@gpadincpa.com
