To Salary or To Contract, That Is the Question!

The decision to hire salaried employees or contractors is a crucial one for corporations in Canada. While both types of workers have their advantages and disadvantages, the choice ultimately depends on the specific needs of the company. Salaried employees are typically hired for long-term engagements and receive a salary or hourly wage, as well as benefits such as minimum wage, overtime pay, and paid vacation. On the other hand, contractors are hired for specific tasks or projects and are paid a fixed fee or hourly rate. They do not receive the same benefits as salaried employees, but they can offer businesses greater flexibility and reduced costs. It is important for corporations to carefully consider all of the factors involved before making a decision.

According to the Canada Revenue Agency's document "RC 4110 - Employee or Self-employed?", the distinction between salaried employees and self-employed individuals is based on several factors:

Control: Salaried employees are typically subject to more control by their employers than self-employed individuals. Employers have the right to direct and control the work of their employees, while self-employed individuals have more autonomy over their work.

Tools and equipment: Salaried employees are usually provided with the tools and equipment they need to perform their work, while self-employed individuals are responsible for providing their own tools and equipment.

Subcontracting work or hiring assistants: Salaried employees do not have the right to subcontract their work or hire assistants, while self-employed individuals can do so.

Financial risk: Salaried employees do not bear the financial risk associated with their work, while self-employed individuals do.

Responsibility for investment and management: Salaried employees are not responsible for investing in or managing the business, while self-employed individuals are.

Opportunity for profit: Salaried employees do not have the opportunity to earn a profit from their work, while self-employed individuals do.

It is important to note that the determination of whether an individual is an employee or self-employed is based on the specific facts of the working relationship as a whole.

Hiring contractors can offer businesses greater flexibility and reduced costs, but it also comes with certain responsibilities and obligations. According to the Canada Revenue Agency, corporations that hire contractors are required to report all payments made to the contractor for the calendar year on a T4A slip. The corporation must also ensure that the contractor is not actually an employee, as this could result in tax or legal consequences. Additionally, if the corporation hires contractors who are considered workers, they would be required to pay certain provincial premiums such as Workplace Safety and Insurance Board (WSIB) in Ontario and WorkSafeBC coverage in British Columbia.

Corporations that pay salaries, wages, or most other types of remuneration to an employee are required to deduct certain withholdings from each wage payment made to the employee. The employer is then required to periodically remit the amounts withheld on account of the employee’s personal income tax, Canada Pension Plan contributions, and Employment Insurance premiums. Employers are ordinarily required to remit the amounts withheld to the Receiver General of Canada on or before the 15th. of the month following the month in which the payments are made. Particularly larger employers may be required to withhold more frequently and particularly small employers may be able to remit quarterly. Employers must also file annual T4 information returns on or before the last day of February in the year following the one in which the payment was made. WSIB payment frequency is determined by the employer’s estimated insurable earnings for the year. Employers with estimated insurable earnings of $25,000 or less are required to make monthly payments, while those with estimated insurable earnings of more than $25,000 can choose to make monthly, quarterly, or annual payments.

Let’s look at an example for Joe Johnson, who has been hired as a full-time employee by ACME Corporation. He has an annual salary of $100,000 per year. In addition to WSIB premiums, the corporation will be required to remit the following CPP and EI withholdings to the CRA for the 2023 tax year:

Gross salary (or pension income)	$100,000
Federal Tax Deductions	$14,397
Provincial or territorial tax deductions	$6,525
Ontario health premiums	$750
Total tax on salary or pension income	$21,671
Canada Pension Plan (CPP) deductions1	$3,754
Employment Insurance (EI) deductions2	$1,002
Total Deductions on salary or pension income	$26,427
Average tax rate	26.43%
Net Amount	$73,573

The employer will remit the following amounts to the CRA for the 2023:

CPP employee portion:	$3,754
CPP employer portion:	$3,754 (mirroring employee contribution)
Total CPP Remittance:	$7,508

EI employee contribution:	$1,002
EI employer contribution:	$1,402 (1.4x employee contributions)
Total EI Remittance:	$2,404

Total amount to be remitted to the CRA: $9,912

While hiring salaried employees can be more laborious for corporations, there are also several benefits to hiring employees on a salary basis. Salaried employees are typically hired for long-term engagements and receive benefits such as minimum wage, overtime pay, and paid vacation which provides the employees with greater job security and stability, which can lead to increased job satisfaction and productivity. Additionally, salaried employees are often more invested in the success of the company and are more likely to stay with the company for a longer period of time. In addition, salaried employees are typically subject to more control by their employers than self-employed individuals, which can help ensure that the work is being done to the company’s standards.

For further information please contact Softron at 1-877-SOFTRON or visit www.softrontax.com