Contractor vs. employee — what’s the difference?

Hey there, time traveller!
This article was published 14/06/2023 (918 days ago), so information in it may no longer be current.

Dear Money Lady,

I have been offered a new job as a contractor and I am not sure if I should take it. Could you tell me what the difference is between an employee versus a contractor?

Thanks,

Jenn

Dear Jenn,

Great question – and I’m sure most people would like to know the difference.

Most Canadians, if given the chance to take a contracted position over an employee position, will always choose to become an employee, thinking it is more secure and better than being labelled an independent contractor. This is a false notion, one which often leaves a lot of money on the table. Long-time contracted Canadians know the benefits of this employment choice, and many would never opt to go back to being an employee. So, let’s discuss the differences and you can choose for yourself.

The main difference between an employee and an independent contractor is in taxation, deductions, and benefits. As a contractor you are responsible for paying your own income taxes and making Canada Pension Plan donations and, because you are not an employee, you will most likely not have any health or dental benefits. Because of this, contractors are always paid more than employees and often have more freedoms.

Contractors can work for many different clients or companies, they have fewer restrictions, and are usually free to perform their duties the way they want to — provided the contracted work is completed within the time frame agreed upon.

They are always paid without deductions, so it is necessary for a contractor to budget for income taxes and set up a savings strategy for retirement. I have been an independent contractor since I was 22 and would never go back to being an employee. As a contractor you are always paid more and can write off personal expenses to reduce your overall income. Cell phone fees, car expenses (gas, mileage, depreciation, or lease payments), home office, stationery and office expenses, equipment, gifts, meals, and entertainment are just a few of the write-offs most contractors use to lower their taxable incomes.

In my opinion, it is your take-home earnings that matter most. Someone who earns a six-figure income but is taxed at the highest marginal tax rate and then has multiple deductions from their cheque is far worse off than a contractor who makes less but takes home more.

As an employee you normally do not have the opportunity to profit from your work. You don’t make an investment into performing your job other than showing up and providing the services required by the employer. You are entitled to benefit plans, along with group health and dental insurance. All required deductions and taxation payments re calculated by your employers, and you receive your net income in the form of a regular paycheque. Most people believe that as an employee you are “safer” than a contractor with more job stability. This may not be true, since anyone who is not doing their job runs the risk of being fired or being laid off if their employers face financial difficulty.

If you can become a contractor in your working career, you should. You may find, as I did, that you never want to go back to being an employee.