What Are the Implications of Hiring Employees vs. Contractors?

Is your business growing? Then expanding your team is probably on your mind. But how you do so, whether through employees or independent contractors, comes with significant implications. Here’s a breakdown of what to consider before making any hiring decisions.

Employees vs. Contractors: Key Differences

The difference between an employee and an independent contractor revolves around independence, control, and structure.

Employees are integrated into your business. You direct their day-to-day work, set their hours, and provide any needed tools, training, and platforms to deliver tasks in ways that work for you. Employees are part of your company culture and typically work for you as their one and only job.

Contractors, on the other hand, operate independently. They typically use their own equipment, work with multiple clients, and control how and even when they deliver work, so long as it meets your agreed-upon terms.

Being accurate matters, as misclassifying someone can lead to significant financial and even legal consequences.

Financial and Tax Implications

Another major difference between a contractor and employee comes down to payroll-related obligations.

When you hire an employee, you’re responsible for:

• CPP or Social Security contributions
• Employment Insurance
• Vacation pay
• Health benefits, if applicable
• Remitting taxes
• T4 slips (W-2s in the U.S.)
• Meeting any compliance requirements

Contractors, however, handle their own taxes and benefits; you simply issue a T4A slip (1099 if the U.S.), and that’s that. You’re not responsible for deducting or remitting taxes on their behalf; that’s up to them.

As your finance team, our Zenbooks professionals can help determine whether hiring employees or contractors makes more financial sense for your company.

Long-Term Fit

If you’re looking to build a long-term, collaborative team, employees are typically the better choice. They’re more likely to grow with the company and take on evolving roles, contributing to a strong, team-oriented culture.

If you’re looking to quickly scale up or down, contractors may be the better fit, especially if you work in an industry that experiences peak periods and an off-season. Plus, you don’t have the added costs of investing in benefits or extensive training.

Through our advisory services and ongoing insights, you can plan with purpose, making smart decisions that align with your overall objectives.

There are also important legal considerations to keep in mind. Misclassifying a contractor as an employee, or vice versa, can result in penalties, audits, and back taxes. In Canada, the CRA has specific guidelines on how to determine the nature of a working relationship so you can more easily and accurately classify all those you work with.

Additionally, you’ll need to consider any state-specific or provincial employment laws, industry regulations, and even human rights legislation. If you’re operating in both Canada and the United States, navigating cross-border rules can add complexity. Working with a finance team that has that kind of cross-border experience can save a significant amount of hassle and time.

So Which Is Right for You?

The choice between hiring employees or contractors isn’t just about immediate costs or implications. It’s about building the right foundation for your business. Because both options come with pros and cons, the best choice is highly dependent on your industry, growth stage, and long-term goals.

Here at Zenbooks, we take a collaborative approach with our clients, becoming a true extension of the companies we work with. Whether you’re hiring your first contractor or building out a full-time department, we’re here to ensure all considerations are accounted for.

Partner With Us Today

Our professionals aren’t only here to help effectively build out your team. We offer everything from accounting and bookkeeping to payroll and tax services, all to help you protect and grow your business. Schedule a complimentary consultation to get started.