🚩 Employee vs. Contractor — CRA Penalties You Need to Know

Thinking of hiring help for your business? One of the biggest traps for small business owners is misclassifying a worker as a contractor when the CRA says they should be an employee.

Many people think paying someone as a contractor saves time and money — no payroll taxes, less admin — but if the CRA disagrees, the cost can be huge.

📌 Here’s What Happens:
When you pay a worker as a contractor, the CRA doesn’t get payroll taxes like CPP, EI, and income tax. If they think your contractor should actually be an employee, they’ll come after you to collect all unpaid payroll taxes — including the employee’s share — plus penalties and interest.

👉 Red Flags That Can Trigger a CRA Investigation:

• The contractor files their taxes and the CRA audits them — this can lead them straight to you.
• One of your biggest expenses is contractors instead of regular payroll.
• A worker tries to claim EI and gets denied — then asks the CRA for a ruling on whether they were actually an employee.
• A worker thinks you misclassified them and requests a ruling — they can do this anytime.
• A worker files their taxes, owes money, and asks the CRA to take a closer look.

If the CRA investigates, they’ll interview you and the worker face-to-face, use their checklist, and make a ruling. If they find you misclassified the worker, you must back-pay everything — payroll taxes, the employee’s portion, penalties, and interest — going all the way back to the start of the working relationship. You can’t pass these costs onto the worker.

And it doesn’t just affect you — your worker could face extra penalties if their tax return doesn’t match what you reported.

✅ How to Protect Your Business:

• Read and follow the CRA’s worker classification checklist.
• If you’re unsure, call the CRA and request a ruling before you sign anything.
• Remind contractors to report all their income — you will too.
• If it looks like an employee and acts like an employee — it probably is one.
• If you don’t need someone full-time but the role calls for an employee, consider hiring part-time, on-call, or through a temp agency (they handle the payroll for you).

The penalties for getting this wrong can cripple a small business — so double-check, stay organized, and don’t take shortcuts.

📌 Need help figuring this out? Castle Accounting can help you classify your workers correctly and avoid nasty surprises. Message us any time — we’re here to protect your business.

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