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Employee vs Contractor: How to Know the Difference

Hiring the right team is one of the most important things a small business owner can do to avoid burnout. A big part of hiring the right team is knowing the difference between employees and contractors. Understanding this difference can also help save you headaches and legal issues down the line.

Do you know the difference between an employee and a contractor? Are you aware of the rules surrounding them and your obligations as a small business owner? You likely need both types of workers on your team, so keep reading to understand this critical distinction and ensure you’re using your workers correctly.


To understand the difference between employees and contractors, think about your first job. Maybe it was flipping burgers or babysitting the neighbour’s kids. If it was the former, you were an employee of the burger joint. If it was the later, you were technically a (very informal) contractor.

That’s because employees are regular staff, hired to work either part time or full time. You had to sign a lot of papers before you started, you were given a list of duties and instructions on how you were to do them, and you were given a schedule and location to work.

Ultimately, as an employee, while you were on your assigned shift, you were at the beck and call of your employer (within reason, of course). Your employer had a lot of control of how and when you did you work. And in return, you had a lot of rights like termination rights, along with benefits, like health care and sick leave.

You also would have had your payroll taxes (CPP, EI, etc.) withheld from your paycheque, and your employer would have given you a T4 at tax time.


On the other hand, if you were a babysitter, you had none of these rights or benefits. But you also had complete freedom over how you performed your task. You were hired to keep the neighbour’s children safe during a set period of time. If you wanted to entertain them with enriching activities or just plop them down in front of cartoons while you talked on the phone, that was up to you.

That said, if the parents weren’t happy with how you cared for their children, they wouldn’t have to call you back. You’d have no recourse if they decided to start working with someone else.

Of course, in the ‘adult’ world, contract work is a little more professional, but the principles are the same. Contractors are independent workers hired to perform a set task. They’re hired for their expertise, and so they get to determine how they complete that task.

Typically, you’ll sign a contract with a contractor (hence the name), which is your opportunity to lay out your expectations for their work. Also, contractors aren’t on payroll, so they invoice you, and take care of their own taxes.

Employee vs Contractor: Common Mistakes

Small businesses typically require a mix of both types of workers, both employees and contractors. Employees are often the best choice for long-term and/or essential roles in your company, as well as for customer-facing positions. They are also best for tasks over which you’d like to exert more control.

There are two common mistakes small businesses make regarding their employees. First, they may try to get away with paying their employees less, by claiming they are contractors. This is a big no-no which can lead to (very) expensive lawsuits. If you need an employee, hire an employee. Period.

The second common mistake small business owners make with employees is not withholding the correct fees and taxes. This is typically done out of ignorance rather than malice, and it’s yet another reason why getting help with your accounting is usually a no-brainer.

When considering hiring a contractor, consider what outside expertise could help you meet your main business goals. For example, website design and office cleaning and maintenance are roles that are often outsourced.  Outsourcing your taxes and accounting to a virtual finance team also often makes sense for small companies, because full-time accountants are expensive, but this is still critical work that needs to be done well.

The biggest mistake we see small businesses frequently make with contractors is not being explicit in negotiations. Remember, contractors get to decide how they complete their tasks. You therefore have to be very careful when selecting a contractor, as well as when developing what will hopefully be a very precise and detailed contract. Be clear about what your expectations will be. We offer customizable plans, for example, and we are very clear with our clients about what we offer before getting started.

We love helping clients get their business finances in order, along with payroll support, management and advice. Reach out to learn more.

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