What's the difference between being self-employed and being an employee?
The Canada Revenue Agency (CRA) looks closely at how workers engage with one another to determine self-employed vs. employee status.
First, they determine if the worker has entered a contract of service (also known as an employer-employee relationship) or if a contract for services was created between two businesses. The latter indicates a self-employed relationship.
Second, they ask questions about the working relationship to learn the level of control the payer has over the worker's duties, who is providing the equipment to do the tasks, and whether the worker can hire additional help or subcontract the tasks.
Let's look closer at the qualifications of being classified as a self-employed worker or as an employee.
Qualifications for being self-employed
The CRA will determine that a worker is self-employed and running their own business if the worker is self-directed and working independently. There are no supervisors looking over their work, and they conduct the work on their own terms and time schedule — usually for multiple clients at once.
Self-employed workers:
- Can refuse work tasks from a client
- Provide their own tools and equipment to do the work
- Are not regulated by a client's company rules
- Can hire a subcontractor to assist with tasks
- Are liable for all expenses related to performing the work
Within the self-employed designation, the Canadian government recognizes the subset position of independent contractor. Often this term is used interchangeably with self-employed, but there are a few distinctions.
An independent contractor explicitly provides specific services to a targeted buyer on a contract basis.
For example, if you hire a graphic designer to create your new business logo, that is a specific transaction between two parties and fits the independent contractor status. However, if the graphic designer creates a website of stock artwork for the public to download and use at their leisure, the artist would be considered self-employed because they aren't creating graphics for a designated buyer within a specific contractual agreement.
When working with contracts, all Canadian business owners should have the documents legally prepared, or at least reviewed, to ensure all parameters are met — including the potential need for specific insurance coverage during the contract period, and an indemnity clause to cover liabilities, loss, or damages.
Qualifications for being an employee
The CRA classifies a worker as an employee of a company when the employer, or payer, controls various elements of how and when the work is carried out (work schedule), determines the method and amount of pay (salary or hourly pay rate), and determines what job the worker will do (job title).
Employees often receive training and the tools needed to complete their job. The repair and maintenance of those tools are also handled by the employer.
Employees:
- Cannot hire assistants or subcontractors
- Follow the rules set forth by their employer
- Use equipment provided to them by their employer
- Are not responsible for operating expenses