It’s no secret that independent contractors make more money than company employees in Canada. But why?
Most employers prefer to hire an independent contractor because it means less paperwork and no payroll. Employers are also off the hook for employee benefits such as pension plans when hiring an individual for contract work.
Not only do employers prefer to hire contractors, but individuals can also make significantly more money through contract work. Why do contractors get paid more? Several factors contribute to their significantly higher earnings.
First, let’s determine the main differences between employees and independent contractors.
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Employees vs Contractors
The CRA considers several factors when determining whether an employed worker is an employee or independent contractor.
Employees
Generally, an employee heavily relies on the company for income, has little control over the work an employer assigns to them, and uses the tools or supplies that the company owns.
Organizations with employees will have the final say over how the employee should perform the job and when they should show up to work. Employees will also utilize tools or equipment owned by the business.
Contractors
Unlike employees, contractors will generally own the equipment they use for a job and have more control over a project. An organization that hires an independent contractor for a job will work alongside the contractor while entrusting them with a majority of the responsibilities.
Additionally, companies are not required to provide independent contractors with employee benefits such as sick days, healthcare coverage, or paid vacation days. Entering into a contractor agreement typically doesn’t require a long-term commitment, making it a favourable and less risky business relationship for an employer.
Tax Benefits
One of the main reasons contractors make more money than employees is that they pay less in taxes.
For employees, the employer handles the income tax due by deducting it from the employees’ paychecks. As a result, employees get a T4 form to file to the Canada Revenue Agency, or CRA.
On the other hand, Independent contractors are responsible for keeping track of their own income tax requirements. Although this requires more effort on their part, contractors can reduce their taxable income by listing business expenses. These expenses can include vehicle, tax preparation, supply, and other out-of-pocket expenses related to contract work.
Additionally, contractors who work from home can earn a 10% deduction of maintenance costs for their homes on their income taxes if they use their homes for their primary business operations. Typically, your home office must take up at least 10% of your total house space to qualify for the tax deduction.
To prepare for tax form submission, independent contractors must keep track of their earnings and official records. Contractors will need to report their gross income, expenses, and net income on their annual tax returns. Those who earn over $30,000 in a year will also need to collect and charge GST/HST.
It is also essential that contractors hold onto their tax records for at least six years following a Notice of Assessment. Should the CRA request these forms in the event of an audit, they will require forms from the last six years.
The GST
The GST is the goods and services tax. Contractors who earn an income over $30,000 per year will need to register for the GST. Contractors must file their GST returns bi-annually, bi-monthly, or every month, unlike annual income taxes.
Contractors can calculate their total goods and services tax by multiplying the GST rate, which is five per cent in Canada, by their total cost of goods before tax. For example, if a contractor has $100 worth of goods, they will multiply the $100 by five per cent to get a GST of five dollars.
Contractors Can Charge More
Another key reason contractors make significantly more money than employees is that they can charge more for their services. The reason is that most contractors have a higher specific skill set for which employers are willing to pay more money.
Contractors also take on a greater financial risk than employees do. Employees can expect a regular salary or commission paycheck without worrying about a loss. This consistency gives employees minimal risk.
In contrast, contractors have more business responsibilities. Independent workers generally have their own tools, insurance plans, and other expenses that a company would cover if they were an employee. They are also responsible for handling downtime due to sickness and typically do not earn paid vacation.
Despite increased work and business expenses, experienced contractors who can successfully manage their various responsibilities earn significantly higher income than a typical employee.
How Do Contractors Get Paid?
Why do contractors get paid more, and how are they paid?
Unlike employees, independent contractors do not have a consistent paycheck that they can expect every other Friday. Since independent contractors can charge what they want, they can also choose their pay structure.
The most common payment methods for contractors in Canada are hourly rates and per-project compensation. For hourly rates, a contractor can charge the employer a set per-hour rate while quoting an estimated number of hours. Contractors can also charge varying amounts for projects depending on the tools they use, the time it takes, and the job’s complexity.
For some jobs, the contractor will request a certain amount of compensation at the beginning of every month for a set number of hours. For example, a lawyer will request their client to pay their fees in a lump sum at designated times throughout their case.
Employers and contractors will generally agree on a payment method when drawing up a contract before beginning the job. Both parties must come to a mutual agreement in writing to keep for their records.
Can Contractors Qualify for Unemployment Benefits?
Contractors can qualify for unemployment benefits; however, it is more difficult than it would be for a full-time employee at a company who loses their job.
Generally, you are less likely to qualify for unemployment benefits if you can work from home. However, if you can prove that you are unable to work due to one reason or another, you may be able to collect unemployment benefits. Your specific situation will ultimately determine what you are eligible for.
Benefits of Hiring a Contractor
For business owners, several advantages exist to employing an independent contractor.
1. Less Paperwork
One of the primary reasons organizations prefer to hire contractors is the lack of paperwork. Contractors run their own business, which means they are in charge of their taxes, hours, and insurance policies.
Instead of creating new employee packages, hiring paperwork, and training modules, companies hiring an independent contractor only have to keep track of the contractual agreement.
2. Own Equipment
One of the main differences between an employee and a contractor is that contractors use their own tools and equipment. Doing so puts them in charge of maintenance and repair costs. It also means your business has less to manage.
3. No Employee Benefits
Another advantage to hiring an independent contractor is not worrying about providing employee benefits. This includes paid sick days, health insurance, and paid vacation days.
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Group Insurance for Employees
Although hiring independent contractors has several benefits, so does hiring employees. Employees offer longer-lasting business relationships and organization loyalty. Part of taking care of your employees is finding the right group insurance plan.
Unfortunately, finding the best group insurance plan for your employees is not always an easy task. When you need help finding a plan that is both comprehensive and budget-friendly, let the brokers at Group Enroll help.
At Group Enroll, we help businesses across all industries navigate the endlessly available insurance policies to find the best group policy for their employees.
How Do We Do It?
With so many potential insurance providers, how can you know which ones have the best offers for your company?
All you have to do is contact our team at Group Enroll, share some basic information, and let us get to work. After filling out the quote form, one of our experts will call or email you to get a more comprehensive idea of your company’s insurance needs.
Next, we use this information to request a quote from up to ten different insurance providers. When we request quotes, we find insurance policies that best fit your business’s objectives. Finally, we email you with the top competitive quote proposals. We do the searching for you, so all you have to worry about is choosing from the best available policies.
In Summation
Why do contractors get paid more? The answer: Primarily, because they can charge higher rates and pay less in taxes.
Several companies throughout Canada prefer to hire contractors for specific jobs. However, when you hire employees, it is your job to find the best group insurance rate.
Group Enroll’s job is to help you narrow down your search by finding the best quotes from top-rated insurance providers. Email us at hello@groupenroll.ca or find us at 10 Great Gulf Drive, Unit 5, Vaughan, ON, L4K 5WI to get started.