SME taxation: the impacts of hiring self-employed or salaried workers

Many small and medium-sized enterprises (SMEs) are faced with an interesting choice when it comes to hiring employees. Essentially, depending on your company’s occupational sector, you may be able to do business with self-employed workers. Whether you own a dance studio or something similar, the choice between hiring employees or using self-employed workers is a recurring one. However, many small business owners are unaware of the impact on taxes and employer responsibilities.

Here are the various impacts on your taxation that can result from hiring employees to the detriment of self-employed workers.

Self-employed or salaried: more than a status, a world of difference

Self-employed worker status greatly differs from that of an employee. However, determining status is more complex than it seems. Sometimes, depending on their respective criteria, the federal and provincial governments can come to different conclusions about the classification of an individual. Here are the criteria for determining a person’s contractual situation.

Criteria for determining status

For Revenu Quebec, the distinction between self-employed and salaried workers is determined by a set of 6 indications:

• Effective subordination in the work (are you organizing their schedules, training, etc.)
• The financial criterion;
• Ownership of tools;
• Integration of completed work;
• The result of the work;
• The business relationship between the different parties.

While these criteria are good elements in determining the status your hires, the final decision rests with the various revenue agencies.

Tax implications for SMEs

When you hire a self-employed person for your SME, it is worth understanding the business taxation benefits of this agreement. In effect, as an employer, you have less responsibility towards a self-employed worker than an employee. The self-employed worker is technically a service provider. You become his client.

Responsibilities to an salaried employee

Unlike the self-employed worker, an employer who hires a salaried employee must take on several tax and social responsibilities. In particular, he must contribute to employment insurance, the Quebec parental insurance plan, the Quebec pension plan, CNESST, etc. Also, as a boss, you must offer statutory holidays and vacations in accordance with labor standards and, where applicable, in compliance with the collective agreement.

Considerations when dealing with self-employed workers

There are certain peculiarities that must be taken into account when hiring self-employed workers. Certain taxes or changes in status may apply without notice and cause you to incur additional expenses.

Be aware of status changes

Along the way, the status of the self-employed worker you retain may change. Now considered a salaried employee, you will have to repay the contributions you previously did not have to pay. It may be difficult for a start-up SME to cover these additional costs that were not accounted for in its budget. This is why it is important to be aware of these changes.

Added tax

The salary of a self-employed person is negotiated with the employer. However, at some point the bill can increase without warning or explanation. The reason for this is that the self-employed person must charge taxes for services when he or she reaches the $30,000 annual income plateau.

Avoiding unpleasant surprises

When you own an SME, it is important to seek the help of tax professionals to fully understand your financial situation and to conscientiously fill out your corporate tax returns. They can also advise you on what to do about your employees and help you avoid the unpleasant surprises that can arise when you retain self-employed workers.

For more information on the various subjects of corporate taxation, do not hesitate to contact us!