Whether you're happy running a business on your own or plan to expand in the near future and add more help, it's imperative to understand the difference between self-employed vs. employee workers.

Learn why classification matters, the differences between the two, the pros and cons of each, and how record-keeping varies for these types of workers.

• Why you need to classify your workers
• What's the difference between being self-employed and being an employee?
• Benefits of hiring a self-employed worker
• Drawbacks of hiring a self-employed worker
• Benefits of hiring an employee
• Drawbacks of hiring an employee
• Record-keeping for a self-employed worker
• Record-keeping for an employee
• An accounting solution for all workers
• FAQ

Why you need to classify your workers

If you decide to hire help, they need to be designated as either a self-employed worker or an employee. These two classifications have different sets of rights under Canadian law.

In Canada, employees of a business are covered by the Employment Standards Act and the Canada Labour Code. They are eligible for employee benefits such employment insurance (EI) under the Employment Insurance Act and access to the Canada Pension Plan (CPP), and they're subject to the rules of the Income Tax Act.

Self-employed workers are operating their own businesses. They offer their goods and services on a contract basis to other businesses and individuals. They must comply with small business rules, which include paying business taxes. Some self-employed individuals are eligible for government services and benefits such as EI, CPP, and more via Service Canada.

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

Benefits of hiring a self-employed worker

If your Canadian business needs assistance for a temporary period of time, or for one specific task, contracting with a self-employed worker can be beneficial. A self-employed worker is sometimes called a freelancer, consultant, or contributor.

For example, you might work with a self-employed graphic designer to update your restaurant menu or a self-employed web designer to launch a new website. Once those tasks are complete, your working relationship is also complete.

When you hire a self-employed worker, you as an employer are not responsible for providing the equipment for the person to do the job. You also don't have to offer the worker any benefits such as health insurance or a pension plan. In your contract for services, you simply outline the parameters of the work, the final goal, and the pay rate, then follow those conditions.

Drawbacks of hiring a self-employed worker

Of course, working with a self-employed worker can come with a few downsides. Since they are not your employee, you as an employer cannot dictate when and how they work. They are not "on the clock" for you, and they don't have to report to your place of business to do the work.

For example, the self-employed graphic designer who is updating your restaurant menu can work from their home office, using their computer, to design the menu. They will likely share the digital files with you online, or they might print out a paper copy for your review. They can do this task at any time of day, as long as they meet the agreed-upon deadlines for the project milestones and completion.

In this type of working arrangement, you trust the self-employed worker to get the task done without supervision, and often with little intervention or guidance.

You can't stop by their desk to check in randomly or call them and expect an update during your business hours, as your working hours may not align with theirs.

To nurture good communication, establish set check-in times in the contract so you're both available simultaneously.

Benefits of hiring an employee

If you need ongoing help to complete a specific task at your business, you should hire an employee. Employees do the work they are assigned by their supervisor and are available for your work tasks during the hours you set for them. By educating the employee on standards and procedures, you have complete control over how you'd like the work to be carried out.

For example, if your restaurant needs a hostess, you would hire an employee to fill this position on specific days of the week, for specific hours. The employee will be expected to show up during these times and do the tasks you train them to do. They provide stability and ongoing service to your business.

Your relationship with an employee is continuous until you or the employee decides to end it. The relationship is also not limited to a specific task. An employee can be promoted to a new position or trained to do several types of tasks during their set working hours.

Drawbacks of hiring an employee

If your business needs ongoing help and you hire an employee, you are legally obligated to offer them several benefits. While these aren't necessarily drawbacks, they do add to your business expenses.

By hiring an employee, you must provide them with benefits, including employment insurance and access to the Canada Pension Plan. You should also deduct income tax from their wages and follow all the rules of being an employer in Canada.

Record-keeping for a self-employed worker

Whether you're an employer hiring an employee or you're self-employed and working on contract with others, you need to keep track of your expenses and income.

Self-employed individuals can benefit from using QuickBooks Self-Employed. This accounting solution is designed for solopreneurs to help keep their business finances organized. You can use QuickBooks Self-Employed to organize receipts for tax deduction purposes, generate invoices for clients, create cash flow reports, track business mileage, calculate self-employment tax, and so much more.

Record-keeping for an employee

If you're a small business with intentions to grow and add employees to the roster, you'll also need an accounting solution to track your business's finances and prepare payroll so you can pay your workers.

Employers can stay organized by using a solution like QuickBooks for Small Business. This tool allows you to send invoices to your customers, accept payments, generate reports, track expenses/inventory/sales, and so much more. Once you add an employee or two, you can also use this accounting solution for all your payroll activities, like generating payroll, calculating payroll taxes, tracking employee time sheets, and even creating work schedules.

An accounting solution for all workers

As you grow your business, you'll quickly discover if going solo as a self-employed worker is the perfect fit, or if it's time to evolve into an employer and hire employees. As you make these transitions, know that you can count on QuickBooks to keep your bookkeeping organized and at your fingertips on your computer and via the mobile app. Learn more about QuickBooks today.