As an artist, the idea of a "regular" or "steady" job probably doesn't apply to you. These days, people are earning income in a variety of ways. When it comes to reporting to the government, though, they want as little ambiguity as possible: they 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 you 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 the CRA at the end of the year how much money you earned.
There are pros and cons to being an employee or a 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 holiday||You are obligated to contribute to EI|
|You are entitled to severance pay if 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 may 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 related to earning your income from your contract income (thus reducing your amount of income tax)||You must pay double CPP – a portion as you the employee, and you the employer|
|You may 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 cover your living expenses|
Which are you (to the CRA)?
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, many 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 or 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 those deemed employees, as well as late filing and reporting penalties.
There are five main criteria that the CRA looks at to determine whether someone is an employee or contractor:
Control (who determines the time, place and way work is to be done)
- Can you decide when, where and how much time you’re going to work on a project? If yes, you’re likely a contractor.
Ownership of tools
- Are you expected to use your personal computer, makeup kit, toolbag (etc.) without being reimbursed? If yes, you can be considered a contractor.
Chance of profit or risk of loss
- 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 if 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 suggest 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 can 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.
- Quick Guide: Am I an Employee? by the Urban Workers Project is a downloadable guide that can help determine if you're getting the benefits you deserve, which is very useful if you are working a contract without the same benefits as traditional employees (preview below).