Today, more and more business owners are turning to freelancers instead of hiring full-time employees. Freelancers can handle everything from one-off jobs to ongoing projects. They’re quick to hire and onboard, they bring valuable expertise to the table, and they’re great at working independently without a lot of handholding.
Besides these benefits, you will also gain some special tax advantages by hiring freelancers over full-time staff members. To help you get the most value out of your independent contractors, here’s what you need to know about the Canadian tax benefits of hiring freelancers and how you can avoid problems with misclassification.
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While incorporating your business is a great first step towards reducing your tax burden, consider hiring freelancers to save even more. Freelancers must report and pay their own income tax, employment insurance (EI) premiums, and Canada Pension Plan (CPP) contributions. This means you won’t have to pay into these benefits like you would for employees. Plus, you don’t have to worry about providing optional employee benefits like disability insurance, extended medical, dental benefits, vision care, life insurance, or employee training. When it comes to freelancers, the rate you agree upon is all you will pay!
Since you won’t have to deduct taxes and benefits from your freelancers’ pay, filling out tax forms is simpler. All you will need to do is file a T4A slip for each freelancer you paid during the tax year. Just make sure you file this information before the last day of February to avoid late-filing penalties!
Faster Payroll Processing
Not only will hiring freelancers make tax time easier, but it will also keep your payroll process simple and quick. There’s no need to calculate deductions or withhold benefits. Instead, all you have to do is issue your freelancer’s payment in full and let them worry about putting some money aside for taxes and benefits. This will save you a lot of time! And since you won’t need a robust payroll processing program, you can get away with using cheaper accounting software.
The Risk of Misclassifying Freelancers
Hiring freelancers sounds like a no-brainer. So, what’s the catch? When you hire independent contractors to work for your business, you have to be really careful to avoid the consequences of misclassifying them. According to HCMWorks, if a federal or provincial agency finds that you have misclassified employees as independent contractors, you may incur significant penalties and legal fees.
Signing a contract with your freelancers isn’t enough to avoid issues with employee misclassification. Make sure you understand the various factors that the CRA uses to determine whether a worker is an employee or contractor. For example, if your business has a high degree of control over the actions of your worker, like how, when, and where work is done, the worker starts to look more like an employee than a freelancer. The same goes for situations in which workers are paid by the hour, day, or week rather than based on a fixed-price contract.
Other Ways to Gain Tax Advantages
If your team is already composed of employees and you don’t need to hire more help right now, look for other ways to gain tax advantages. For example, incorporating your business can reduce your tax rate. According to Ownr, Canadian corporations are taxed at a lower rate than individuals, so you can reduce the taxes you pay by leaving money in your corporation instead of transferring all of it into your personal account. On top of this, incorporated small businesses have access to further tax reductions.
If you’re thinking about onboarding a few new team members to help your business grow, consider turning to freelancers instead of full-time employees. You can save money and time by outsourcing work to experienced independent contractors. Just make sure you know what you’re doing! Hiring freelancers does come with its fair share of drawbacks, so be sure to weigh the pros and cons before committing to your decision.