As a freelancer, you may occasionally need help completing a project for a client. In these cases, you may want to turn to a subcontractor. Essentially, a subcontractor is a contractor who is working for another contractor. If you’re thinking about hiring a subcontractor, you should understand the process as well as the legalities.

Managing Client Expectations

In some cases, the industry standard includes the use of subcontractors. For example, if you are a general contractor building a home for a client, you may hire electricians, plumbers, or other specialists to work as subcontractors. Similarly, if you do marketing on a contract basis for businesses, you may subcontract freelance bloggers, social media strategists, and graphic designers to help with the project.

However, in other cases, clients may expressly expect you to do the work personally. Before hiring a subcontractor, make sure that does not contradict the terms set out by your client. To be on the safe side, consider having a signed contract stating that you may outsource some of the project to subcontractors.

Defining Contractors

When you hire subcontractors, you have to make sure they are truly contractors and not employees. The Canada Revenue Agency has criteria distinguishing between contractors and employees, but the main distinction is based on your relationship. As a litmus test, ask yourself if the worker is entering a contract of service or contract of business with you. The former constitutes an employee, while the latter is a contractor – or subcontractor, in this case.

If you pay someone as a contractor and the CRA determines that person is in fact an employee, you are responsible for remitting Canada Pension Plan contributions and Employment Insurance premiums on that person’s earnings, retroactively.

Forms for Subcontractors

If you pay a subcontractor more than $500 over the course of a year, you should fill out a T4A slip (Statement of Pension, Retirement, Annuity, and Other Income) on their behalf. Give two copies of this slip to the subcontractor by the last day of February following the year in which they worked for you. If you send the subcontractor an electronic slip, you only have to send one copy.

However, if you are in the construction industry and you hire a subcontractor, you should fill out a T5018 slip instead.

Completing Your Tax Return

As a self-employed individual, you are allowed to claim money paid to subcontractors as a business expense on your tax return. You can report these expenses on Form 2125 (Statement of Business and Professional Activities). You should report most of your subcontractor payments on line 8360, but if you subcontracted a business consultant, you should report that expense on line 8360 along with legal and accounting fees. Even if you paid a subcontractor less than $500 and weren't required to issue a T4 or T5018, you can still claim the cost on your tax return.

Completing Your Tax Return

As a self-employed individual, you are allowed to claim money paid to subcontractors as a business expense on your tax return. You can report these expenses on Form 2125 (Statement of Business and Professional Activities). You should report most of your subcontractor payments on line 8360, but if you subcontracted a business consultant, you should report that expense on line 8360 along with legal and accounting fees. Even if you paid a subcontractor less than $500 and weren't required to issue a T4 or T5018, you can still claim the cost on your tax return.