Hiring Independent Contractors
Canada versus U.S.

BOOKKEEPER'S HANDY REFERENCE

by L. Kenway BComm CPB

When hiring independent contractors in your business, make sure you are familiar with what constitutes an employee vs a self-employed independent contractor. Misclassifying can be extremely costly.

This is a frequently audited area in Canada and the U.S. because employee payroll tax rates and benefits are more costly to the employer. It can be advantageous to hire an independent contractor instead of an employee.

Pour yourself a cup of tea and let's look at what you need to know.


Hiring of independent contractors is a frequently audited area. Know the rules!Employee? ...
Know your tax reporting requirements when you hire an independent contractor.or Independent Contractor?


Hiring Independent Contractor Rules

CRA

Over the years the courts have determined that four tests need to be met to determine employment status:

  1. the control test;
  2. the integration test;
  3. the economic reality test; and
  4. the specific results rest.

Click to learn more about these tests here.


IRS

The three categories/factors which determine whether a person is an employee or an independent:

  1. behavioral control;
  2. financial control; and
  3. relationship of the parties.

Learn more about how these categories are interpreted by the IRS. Find the "old" checklist of 20 items the IRS takes into consideration when auditing independent contractor status.


Tax Reporting Forms and Deadlines

Canada
Threshold over $500

Click here to determine whether you need to issue a T4A slip or a T5018 slip.

T4A subcontractor business services
examples: bookkeeper, accountant, lawyer, janitor. DO NOT REPORT personal services such as hair salon service or dental work.

T5018 construction services examples: construction of buildings, roads, and bridge.

U.S.
Threshold over $600

  • Form W-9 keep on file upon hiring
  • Form 4699 request contractor signature before or when issuing 1099MISC
  • Form 1099MISC Copy B deadline to contractor January 31
  • Form 945 required if you want to send 1099MISC by eMail
  • Form 1096 deadline to IRS February 28/March 31
  • Form W-8 (and 1099MISC) for foreign contractors

Click here to learn who should receive a MISC1099. Learn the two general rules.


When Hiring Independent Contractors
Written Agreements Are A Must

CRA

Click here what happens if the written terms of your contract
contradicts oral testimony and source documents.

IRS

Click here for a checklist of what to include in your written agreement with an independent contractor.

Think about / consider asking for a copy of their business license for your file.



Penalties For Misclassifying A Worker

Canada

Penalties of 10% on income tax, CPP and EI which are not withheld on the first failure to withhold, with the penalty potentially increasing to 20% for
repeated offenses, as well as non-deductible interest on the amounts owing.


Both the employee and the employer’s portion of CPP and EI plus penalties and interest.


Late filing penalties on the failure to file T4 Statement of EI forms.

U.S.

Click here for the penalties if the IRS determines you have misclassified a worker. The penalties are different for intentional vs. unintentional misclassification when hiring independent contractors.

Learn about the IRS Voluntary Classification Settlement Program.



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