According to Statistics Canada, over 15% people work as independent contractors. This is a significant portion of the workforce, and occasionally causes, organizations to rethink their business model. Does it make sense to hire freelancers if workloads increase or a project falls outside existing employee skillsets? Organizations must know how to manage independent contractor payroll.
The difference between employee and contractor in Canada
Canadian employers are responsible for deducting Canada Pension Plan (CPP), Employee Insurance (EI), and other employee taxes. These are filed with the Canada Revenue Agency (CRA) by the employer on behalf of the employee. Employees also receive benefits such as paid time off or insurance benefits. Their contracts include legal protections compared to a contractor’s.
An independent contractor files tax and insurance deductions themselves. They are not entitled to any benefits offered to full-time employees nor are they given legal protection according to the Canada Labour Code. As an employer, it is important to clarify the categorization to the candidate. These factors differ if the work relationship is in Quebec.
Employment Laws in Canada
Employment laws in Canada differ province to province. Federal laws outline rules for all workers nationally, while provincial laws guide labour relationships. Employment law is governed by common law in all provinces except for Quebec where labour relationships are governed by the Civil Code of Quebéc.
Employers in Canada have to give a valid reason for terminating employees but when it comes to independent contractors, this regulation may not apply. Employers can often end their contracts with independent contractors at anytime without notice. But many independent contractor agreements can include a notice period, payment, or penalties regarding termination. It is important to always refer back to the conditions of the contract when making a decision like this.
Ways to pay contractors in Canada
Paying independent contractors is dependent on how you want to handle taxes, how many contractors you plan to hire, their location, and how frequently you will be paying them. So whether you need to do payroll for one, or more, you may consider the following:
- Cheque or international money order: A traditional payment method but not as commonly used anymore due to the inconvenience of physical paperwork.
- Bank transfer: Commonly known as direct deposit and direct payments. Organizations may need to pay a small fee but is generally lower than a wire transfer.
- Wire transfer: Fastest transfer speed when sending money domestically. Costly option that businesses may not be able to afford on a regular basis.
- Payroll services: Regular employees and independent contractors are paid differently. Third-party payroll services are well versed in this difference and have the legal and financial knowledge to ensure payment is delivered.
Benefits of paying independent contractors through a payroll system
Some companies pay independent contractors through accounts payable as a business expense, but it may be more efficient to use a payroll service that clearly differentiates between employees and independent contractors. The benefits of doing so include:
- Quick, automatic payments: Payroll software can accommodate direct deposit so that freelancers or independent contractors receive the fast payments they crave.
- Accurate payroll records: Integrating employee payments with independent contractor transactions allows all payroll data to be saved in one place.
- Comprehensive reporting: Organizations can run reports to see how much they’ve paid independent contractors year to date.
Frequently Asked Questions
What are typical payment terms for contractors?
Typical payment terms include a payment due date from the date of the invoice. Prepayment may also be required if contractors need to secure specific equipment.
How long do you have to pay a contractor’s invoice?
The contractor’s invoice should include a payment due date.
Do independent contractors get a T4?
Independent contractors do not get a T4 as a T4 is a Statement of Remuneration that is given to employees by an employer to report income for taxes. A T4A slip is issued to independent contractors from each of their clients for the jobs completed to help record income and calculate taxes owed.
Do independent contractors receive a record of employment (ROE)?
Employers do not need to issue an ROE for independent contractors. ROE is a form that employers fill out for employees receiving insurable earnings who stop working and experience an interruption of earnings.
What is the difference between self-employed and independent contractor?
Although independent contractors are considered self-employed, not all self-employed people are independent contractors. Independent contractors provide a service to a specific client on a contractual basis.
What is the difference between a subcontractor and an independent contractor in Canada?
Independent contractors are paid by the client on a contractual basis, while subcontractors are employed and paid by the independent contractor. It is a difference in employment relationships.
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