For tax purposes the distinction between an employee and an independent contractor is important for the following reasons:
- The deductibility of expenses is considerably more restricted for employees. Self-employed individuals may take more deductions.
- Employers must remit income tax, EI payments, and CPP payments to the CRA for employees only.
Non-tax implications for independent contractors include:
- Ineligibility for EI benefits, holidays, employer-paid or other non-cash benefits;
- Potential liability issues that arise with independent contracts;
- Inability to collect severance pay; and
- Lack of job security, as well as increased economic risk.
The traditional tests of employee versus independent contractor are:
- Control test;
- Integration and organization test;
- Economic reality test (this is a part of the entrepreneur test – ownership of tools and risk of profit/loss); and
- Specific results test (this is part of the risk of profit/loss elements of the entrepreneur test).