INDEPENDENT CONTRACTOR PAY ARRANGEMENT and RESPONSIBILITIES
To schedule an appointment, contact our law firm at 403-400-4092 or Chris@NeufeldLegal.com
Operating as an independent contractor requires a distinct pay arrangement (as compared to an employee), which also imposes specific responsibilities on the contractor, primarily due to tax obligations and statutory benefits. Although the pay arrangement to the independent contractor (made out to the corporation) might appear relatively straightforward, with a relatively larger payment as compared to what the contractor would have been paid as an employee, the reimbursement of permitted business expenses, and the imposition of GST/HST, what transpires on the back-end for independent contractors is where the key distinctions become readily apparent.
A. Responsibility for Deductions and Remittances (Taxes)
The contractor is responsible for all their own tax and statutory remittances. The business that hires them generally pays the gross amount agreed upon. The contractor must:
-
Set aside and remit their own income tax.
-
Pay both the employer and employee portions of CPP contributions when they file their annual tax return.
-
Generally, they do not pay EI premiums and are not covered for regular EI benefits, though they can opt into EI Special Benefits for the self-employed.
-
If they earn over a certain threshold (currently $30,000 annually), they must register for, charge, collect, and remit Goods and Services Tax/Harmonized Sales Tax (GST/HST).
-
The hiring business issues a T4A slip (Statement of Pension, Retirement, Annuity, and Other Income) to report the total amount paid to the contractor for services.
B. Statutory Benefits and Protections
As the hiring company seeks to take the position that the independent contractor has been engaged in a manner that they are not covered by employment standards legislation, the hiring company proceeds from a position that the independent contractor does not receive:
-
Vacation pay or statutory holiday pay from the hiring business.
-
Entitlement to severance or termination notice.
-
Employer-provided benefits, sick pay, or pension contributions (unless specifically negotiated into their contract).
-
As a result, independent contractors should be looking to charge a higher rate than an employee to cover the costs of these lost benefits and their increased tax burden.
C. Payment Structure
Payment is usually negotiated based on a contract for services, with forms of payment including:
-
A flat fee per project or deliverable.
-
An hourly or daily rate.
-
A retainer for ongoing services.
-
With the indepedent contractor typically invoicing the hiring company, and payment terms (e.g., net 30 days) are defined in the contract.
These are but some of the objective characteristices that distinguish an independent contractor from an employee [more on distinctions]; and also why companies hire incorporated independent contractors. It is also the basis for differentiating an employment agreement from an independent contractor agreement, and why you should proceed from a position of strength and knowledge when assuming work as an independent contractor. For an experienced business lawyer capable of provide you with such legal support and strategic direction, contact our law firm at Chris@NeufeldLegal.com or 403-400-4092 to schedule a confidential initial consultation.
