The reason why it is important for entrepreneurs to understand the difference between employees and contractors has to do with how they pay source deductions says Edmonton bookkeeping. In fact, business owners should understand that while employees will have source deductions withheld from their paycheck, and then have to pay to Canada revenue agency. Contractors do not have any source inductions withheld by the entrepreneur, as they are responsible for paying that themselves. However, business owners need to understand that if they are contractor that they fired has failed to pay Canada revenue agency, then CRA will be coming back to the entrepreneur to determine if that contractor should actually be considered an employee.
If a CRA auditor determines that the contractor should actually be considered an employee, then all of the risk falls onto the business owner. The penalties that an entrepreneur will incur include having to pay all employee source inductions since the first day that they were hired. In addition, the have to pay all CPP and EI on the half of the employer as well. Not only that, but entrepreneurs will also incur a 20% interest penalty for every day that they do not remit that payment to Canada revenue agency. This means, that an entrepreneur who owes one thousand dollars will have that turn into twelve hundred dollars overnight literally. This can be a significant amount, especially with how long that contractor may have been working for an entrepreneur.
With how big a penalty this is, Edmonton bookkeeping says that entrepreneurs need to be very clear if they are hiring an employee or contractor. One thing that can help significantly, is if an entrepreneur creates an employment contract no matter if they are hiring an employee or contractor to do things in their business. By being very clear on who does what, and how much control an entrepreneur has over that person, can help create a case in case Canada revenue agency has questions in the future.
Ultimately, the question of who is an employee or contractor comes down to how much control on entrepreneur has over that person. The more control they have, the more likely they are going to be considered an employee of the business.
However, entrepreneurs can do something that is going to not just minimize the risk, but completely eliminate it Edmonton bookkeeping says that this is ensuring that all contractors that they hire to work on projects in their business are incorporated. When independent contractors are incorporated, they are responsible for filing their own corporate taxes, and the responsibility is no longer on the business owner to pay their source deductions on their behalf. Therefore, business owners who want to eliminate this risk for their own business, simply need to ensure that if they are hiring contractors, that they have their incorporation filed, but they will never be responsible if the contractor that they hired does not pay their taxes properly.
Edmonton Bookkeeping | The Difference Between Employees And Contractors
Any entrepreneurs may not know the risks that they are taking by hiring a contractor in their business, that actually should be considered an employee says Edmonton bookkeeping. In fact, this is one of the stiffest penalties that Canada revenue agency hands out. The reason why, is because they consider source deductions as government funds that are being held in trust. If an entrepreneur is supposed to send that money back to the government, and then they do not, they view that as a mishandling of government funds. As well as using government funds to fund a private corporation.
In order to minimize this risk, an entrepreneur should understand what makes an employee an employee and what makes a contractor or contractor in the eyes of the Canada revenue agency. Ultimately, the question comes down to how much control a business owner has over each person. The more control the business owner has, the more likely they are going to be considered an employee. Less control, means us likely there going to be considered an employee.
Here are a list of the questions that Canada revenue agency is going to take into consideration when making this determination: how much control does this person have over their schedule. Are they able to come in and work on a task whenever they want, or they have to be at work on time, and stayed until a set period of time. Are they responsible for their own expenses, they own the tools that they used to complete their work, do they have the ability to work for other companies, do they have the ability to hire their own staff or assistant to accomplish the job, do they pay their own bills, do they stand to turn a profit or lose money off of this endeavour, do they set their own wages, and tell a business owner how much they are going to charge to do the job, or will the business owner dictate to them the pay for the hours that they worked? These are only some of the fifty questions that Canada revenue agency is going to ask if they have a question about an employee is and who tractor is.
While not every single answer is going to be clear-cut says Edmonton bookkeeping, for example a contractor may not to use their own tools and not by their own supplies, but can still be considered a contractor, because they can come and go whenever they want, hire their own staff, and work for whoever they want. Therefore, even though it is not a clear-cut answer, Canada revenue agency will determine a bunch of questions in order to determine who is who.
Because this is not necessarily a clear answer, if business owners want to minimize this risk, they may want to creates an employment contract, that is very clear on who is an employee and who is a contractor. Or, a business owner may simply want to avoid the problem altogether by ensuring that all contractors that they hire are incorporated, and not have to deal with that problem at all.