As an artist, you are likely aware that there is no such thing as a “regular job” anymore. People are earning income in a variety of ways. Governments tend not to like such ambiguity and would like to classify workers as either contractors or employees.
If you are an employee your employer deducts income taxes, CPP and EI from your paycheque. At the end of the year your employer will issue a T4 reporting the income they paid you and taxes they deducted from you during the year.
If you are a contractor you are invoicing a customer for your fees and the customer is paying you the full amount you invoiced for. You are responsible for reporting to CRA at the end of the year how much money you earned.
There are a few pros and cons of being an employee and contractor. Let's break them down:
|Employee Pros||Employee Cons|
|Employer is responsible for reporting your income to the government and paying your taxes due||You have no ownership over your own work|
|Employer will pay a portion of CPP & EI to the government on your behalf||You are required to follow the policies and procedures required by the employer|
|You have access to employee benefits such as vacation days, paid sick days, paid statutory holi||You are obligated to contribute to EI|
|You are entitled to severance pay is you are fired||You are placing all of your income “eggs” in one basket|
|You can collect EI after you are fired from the job||You cannot deduct any expenses related to your employee income|
|Contractor Pros||Contractor Cons|
|You are your own boss||You are responsible for reporting your income and business-related expenses to the government annually (which means tracking invoices and receipts)|
|You have a greater sense of artistic or professional freedom||You are on the hook if clients do not pay you for your services|
|You can deduct any expenses that you have related to earning your income from your contract income (thus reducing the amount of income tax)||You must pay double CPP – a portion as you the employee, and you the employer|
|You have a wide variety of clients and varied work||If you aren’t working, you aren’t getting paid|
|You are responsible for finding clients and enough work to maintain an appropriate lifestyle|
The government would prefer that everyone is paid as an employee – as it ensures individuals income taxes are paid on time and in full. However, most businesses prefer to hire only contractors, as it reduces their administrative dues (reporting taxes and deductions for every employee) and costs (they don’t have to pay for sick days, vacation days, employer CPP & EI)
Canada Revenue Agency has been known to conduct employment audits of businesses and if they determine that their contractors should have been employees, CRA will charge the business the CPP/EI they should have been paying to CRA for these deemed employees, as well as late filing and reporting penalties.
There are five main criteria that CRA looks at to determine whether someone is an employee or contractor:
*Can you decide when, where & how much time you’re going to work on a project? If yes, you’re likely a contractor
- Are you required to use your personal computer, makeup kit, toolbag and you aren’t reimbursed for it? If yes, you can be considered a contractor
- if you work harder/more efficiently can you increase your profit from the job? Are you on the hook if your equipment is damaged or the person who hires you doesn’t pay you? That would be considered evidence for being a contractor
- How dependent is the worker on the company? Is the main source of income from this one company? Are you not allowed/able to take on other work? That would indicate an employee relationship.
- What does the employment contract look like? What was the intent for the relationship between the business and the worker? Whatever, the intent, it does not override results from the other criteria – so intent alone cannot dictate whether you’re a contractor or employee.
It is important to know that there is no hard and fast rule or single criteria that would determine whether you’re a contractor or employee. However, it is helpful to be aware of the criteria that CRA will be looking at when auditing a business-worker relationship. Read more about how the CRA determines a worker's status on their website.