In times like these, where keeping good workers in your farm operation can be challenging, offering incentives is valuable.
As personal tax rates increase, the question of whether or not a person can be treated as a contractor versus an employee becomes more important.
The question is often initiated by the people being hired because working as contractors will enable them to claim expenses, which will reduce their taxable income.
In many cases farmers can hire help as contractors, but there are cases in which the farmer has been stuck with paying large fines and penalties that could have been avoided.
If a person is hired and treated as an employee, the employer must withhold and pay Employment Insurance (EI), Canada Pension Premiums (CPP), and taxes as well as prepare and submit a T4 for that employee at the end of the year.
On the other hand, if the person being hired is a contractor, the em-ployer simply pays invoices from that contractor and records the cost as with any other expense.
There are no regular remittances to be made for things like EI or CPP and the bookkeeping to account for the work is typically more straightforward.
So what are the risks? An employer has the obligation to deduct and remit the appropriate amounts to the government for things like EI, CPP and taxes.
If an employee is being wrongly classified as a contract worker, the employer has failed to meet the obligation to make the necessary payments and therefore could be liable for penalties and interest, as well as the necessary withholding amounts not remitted in error.
In addition, since it is the employer’s responsibility to collect both the employer and employee portions of EI and CPP, they would be liable for paying the employees amounts not remitted, even though no amounts were withheld off the employee’s compensation.
The risks are not just limited to the employer but the employee as well. If an employee is no longer classified as a contractor, many of the expenses he used to deduct against his income could be disallowed.
This in turn would increase taxable income and could result in significant taxes owing. Interest could be assessed on these amounts and the employee may have to pay for taxes owing they never knew existed.
To determine whether a worker should be an employee or contractor many variables need to be considered.
The following are general guidelines used to determine an employee versus a contractor:
- Have a standard work schedule.
- Report to a supervisor/employer who controls what, how and when work is completed.
- Receives employee benefits, such as medical and life insurance and pension plans.
- Flexible work schedule.
- Works independently with little supervision.
- Provides services to more than one company and has the right to refuse work.
- Has the risk of profit or loss when conducting business.
- Uses their own tools to complete the job.
Although there are various indicators the government uses to determine how to class workers, the problem comes up most frequently when a worker is laid off and tries to collect EI. If that worker had been classified as a contract worker, they likely would not have paid any EI premiums and therefore would not be eligible to collect.
The government may go back to the employer to check if the worker should have been classified as an employee instead (often because the worker insists they should qualify for EI).
This in turn will often bring to question whether the correct treatment has been applied at which point the government will assess whether the proper criteria have been met.
If you are unsure whether a worker is correctly classified or not, you should contact a professional. Failure to treat a worker correctly could end up costing the employer and the worker and ultimately the business down the road.