Whether it’s a boot-strapped startup or an e-commerce store, the individuals brought on board can significantly impact the company’s bottom line. But, with hiring comes choices — should you hire an employee or outsource the job to a contractor? Let’s look closely at each of these approaches and weigh their pros and cons.
Employee Vs. Contractor: A Quick Glance
| Aspect | Employee | Contractor |
|---|---|---|
| Control | Employer has more control over work and schedule | Contractor has more autonomy over work and schedule |
| Tax Withholding | Employer withholds Income Tax, Canada Pension Plan (CPP) & Employment Insurance (EI) | Contractor responsible for own taxes |
| Benefits | Eligible for employer-provided benefits (healthcare, etc.) | No eligibility for employer-provided benefits |
| Expenses | Generally, employer covers work-related expenses | Contractor responsible for own work-related expenses |
| Payment Structure | Paid regular wages or salary | Paid based on contract terms (e.g., hourly, project-based) |
| Termination | Complex; subject to legal requirements (severance pay, notice periods) | Contract termination is usually simpler with set terms outlined beforehand |
| Tools & Equipment | Often provided by the employer | Usually provided by the contractor |
| Training & Development | Employers usually invest in T&D programs to enhance employee skills | Contractors are responsible for their own T&D |
| Cost | Higher costs due to employee benefits (taxes, insurance, T&D) | Lower immediate cost |
| CRA Form | T4 issued to employee for income reporting | T4A or T5018 issued to contractor for income reporting |
Employee Vs. Contractor: The Tax Implication
While employees are directly supervised by the employer and have access to job benefits (health insurance, paid time off, retirement plans), contractors work on a more flexible approach.
| Tax Liability | Employee | Contractor |
|---|---|---|
| Canada Pension Plan (CPP) at 5.95% |  |  |
| Employee Insurance (EI) premium at 2.32% (max 1468.77) | | |
| Statutory Holiday (Stat) paid at 4% | | |
| Vacation paid at 4% | | |
| Sick leave at 2% (BC) | | |
| WSBC at X% | | |
Generally, a company does not need to withhold taxes for contractors since they’re responsible for paying their own premiums, including self-employment and federal income tax. However, since employees are on a company’s payroll, the employer has to withhold all appropriate taxes (Income Tax, Canada Pension Plan (CPP) & Employment Insurance (EI)). Here’s an example of the total costs of hiring an employee at a salary of $75,000 vs hiring a contractor for the same amount.
| Employee | Contractor |
|---|---|
| Base Salary - $75,000 | Base Pay - $75,000 |
| CPP - $4,462.5 | NA |
| EI - $1,740 | NA |
| Estimated Stat (10 holidays) - $3,000 | NA |
| Additional Vacation Cost - $3,000 | NA |
| Sick leave for BC (it can vary from province to province) - $1,500 | NA |
| 1% WSBC - $780.00 | NA |
| Gross Payable: $89,482.50 | Gross Payable: $75,000 |
Hiring Your Own Crew: Pros and Cons
Pros of Hiring an Employee
Close Supervision
When a company hires full-time employees, the employer/line managers have greater control over their work processes and can provide direct guidance. This means that you can oversee their progress and provide real-time feedback to align it with the company’s objectives. If a member’s work doesn’t match the company’s vision, it may correct and propose changes then and there rather than waiting for project completion.
However, this setup has its own cons. The need for constant monitoring and feedback comes with greater time (and effort) commitments, which may detract the management from core operations. Plus, companies might need to invest resources in monitoring and feedback, impacting the business’s bottom line.
Long-Term Commitment/Loyalty
Employees often receive full-time job benefits (medical, pension, insurance, etc), reflecting that the employer is committed to their professional growth and prosperity. These benefits and opportunities, in turn, promote a sense of trust and loyalty in the staff members. As a result, they’re likelier to be more committed to the company’s long-term success, resonating with its values and culture over time. In contrast, contractors may lack the same level of connection to the firm’s vision, preferring short-term gains over long-term success.
Cons of Hiring an Employee
Employer Liability
There are specific sections in the federal law that protect employees — if an employer violates these labor laws, they may face financial implications. For example, if you terminate a team member without a valid reason, you may be required to provide severance pay (calculated at two days’ pay for each employment year). Plus, if an employee works more than the legally allowed time – 40 hours a week – the manager may have to bear overtime wages. As a result, these regulations may cost companies a lot in legal penalties and finances if employees are not handled the right way.
Other legal claims may include:
- Harassment
- Discrimination
- Emotional distress
- Performance/promotion disputes
- Mismanagement of employee
Bonuses & Medical Coverage
Employees are entitled to various benefits as part of their job package, from overtime and health insurance to performance bonuses and more. Plus, companies may also be responsible for paying employment tax on behalf of their workers – add training costs, social events, and retirement plans and the premium will quickly stack up.
Less Flexibility
Unlike contractors, who can be hired for specific projects and high-performing months, employees have a permanent contract that stays valid regardless of fluctuations in business activity. This means that employers have to continue paying salaries and benefits to their teams even during the months when the business slows down (or makes a loss).
Outsourcing Your Business Activities: Pros and Cons
Pros of Hiring Contractors
Greater Staffing Flexibility
When a company hires independent contractors, it gets the flexibility to adjust its workforce more easily. Unlike permanent employees, you can hire and let go of contractors without all that administrative hassle and legalities. This flexibility is particularly beneficial for businesses with fluctuating workloads — letting you hire additional labor force during busy periods and terminate the contracts during slow months.
You may also go for a contract-to-hire approach. This method lets you evaluate a contractor before you hire them, accessing their skillset and compatibility with your company.
Specific Experience & Skill Set
Businesses that hiring contractors instead of employees get individuals with specific experience and skills tailored to the project at hand. For example, if you hire an employee with an accounting background, they may know how to post debit/credit entries and prepare general ledgers. But what if you have to file complex tax returns? Or streamline the payroll process? This is where specialized bookkeeping contractors may help since they know how to steer clear of penalties and CRA audits and save money on tax, all while preparing accurate statements.
No Long-Term Strategy & Extra Costs
With independent contractors, there’s no long-term commitment involved. Since they’re hired for a defined period or project, the company can adjust its workforce according to fluctuating demands. Plus, contractors have little to no extra costs compared to employees since you don’t need to pay taxes, medical coverage, overtime wages, and retirement plans, to name a few. In addition, companies don’t need to pay for a contractor’s equipment and tools because they use their own devices.
Cons of Hiring a Contractor
Less Control
When you hiring contractors instead of employees, you have far less control over your work processes. While independent consultants may complete the projects initially agreed on, how they complete them is up to them. This lack of direct supervision may be challenging for some businesses relying on one-to-one feedback for everyday tasks. However, for companies operating in competitive markets with less time to spare for employee feedback and supervision, hiring independent contractors may be a catch.
Lack of Culture/Company Knowledge
Since contractors work with your company for only a few months/projects, they have limited knowledge of your firm’s culture. Although they may conduct the necessary research to complete a project, the inside knowledge that comes from working in a company may still be lacking.
Final Thoughts
Knowing the difference between hiring contractors Vs employees is vital for businesses to make informed decisions. While full-time workers offer long-term commitment and loyalty, contractors are all about flexibility and specialized skills. Other factors like fewer extra costs, no tax obligations, and employer liability also make contractors a better choice.
For businesses having a hard time deciding the right option, seeking professional assistance might be a good way to go. Transcounts offers comprehensive services tailored to the needs of both short and medium-scale businesses. So, make the right choice now for smoother outcomes and better operations tomorrow.
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