T4 vs. Incorporated Contract Laborers: Learn The Difference

If you are exploring the idea of self-employment or contract work, there is no doubt you will have questions about what your classification of a worker will become. Those who are employed in a traditional setting where they work for an employer may be familiar with receiving a T4 and are familiar with being considered an employee. However, when you are considered a contractor, such as an independent contractor or Incorporated Contractor, your classification, work operations, and tax obligations are a bit different than employees.

At Soni Law Firm, we know that understanding the difference between T4 and incorporated contractors can feel a bit confusing and may even cause disputes between employees and contractors with employers. In this post, we outline what you should know about T4 vs incorporated contractor classifications and help you better understand your own employment.
If you are looking for more information on the T4 meaning in Canada or simply need support in determining whether or not you are a contract worker or employee, an employment lawyer can help. Contact Soni Law Firm today and see why we are the employment lawyer Toronto residents turn to with all of their employment-related concerns.

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For additional insight into determining your status as an employee, see our post, Are Your an Employee, Independent Contractor, or Dependent Contractor? Foodora Case Summary.

T4 Employees or T4 Contractors? What Does It Mean

Once an employer hires an employee to work for him/ her, the employee receives a T4 slip. In other words, a T4 employee is one who works under the standard employee-employer relationship. Being an employee and having a T4 indicates that you are not a contractor, and T4 contractors do not exist.

Being a T4 employee generally entitles one to receive benefits from their employer, such as medical, dental and paid leave. The benefits come into effect after certain periods of time, such as the probationary period. As a T4 employee, your employer is permitted to set your work hours, determine the work you do, and provide supervision. This is important when considering whether you are a contract worker vs employee.

What is a T4?

The T4 meaning primarily relates to your status as an employee, and The T4 slip enlists information about the employees’ income from sources other than work so the organisation may be able to account to the Canadian Revenue Agency. As per the norms of the CRA, a company will deduct taxes from their regular employees if their income exceeds a stipulated bracket.

For more information on T4s and the information they contain, see our post, T4 Slip: Deadlines, summary and what information employers need to include.

Independent Contractors

An independent contractor, or, in colloquial terms, a freelancer, works for a business based on a mutual agreement, be it written or verbal. Examples of freelance workers or independent contractors include copywriters, photographers, accountants, and business consultants, though many other roles can be considered freelance if the worker is not an employee and works for themselves.

As an independent contractor, an individual is responsible for accounting for and paying taxes to the Canadian Revenue Agency. A distinction between self-employed vs employee is that a contract worker will not obtain a T4 and will not be entitled to the same benefits as employees. Some contract workers may have concerns that they are being treated as employees rather than contractors. In these circumstances, it can be a good idea to consult with a contract lawyer.

See our posts, Do Independent Contractors Have to Abide by Non-Compete Clauses?, and Economically ‘dependent contractors’ in Ontario entitled to reasonable notice period, for information relevant to independent contractors.

Incorporated Contractors in Canada

Independent contractors can incorporate their services to form a small business. All income must be declared as business income. Thus, the incorporated contractor is eligible for tax cuts privy to small businesses but will have the onus of accounting for the business’s finances. When considering becoming incorporated vs T4 employment, it is important to consider all the factors that are involved.

As an incorporated worker, you will have greater ownership over the tools, services, and intellectual property you provide to the employer. This also makes you prone to bearing the losses consequently incurred. Though there are risks, many find that being an independent contractor gives them more autonomy over their time and income and is a rewarding venture.
It can be helpful to speak with both an accountant and an employment lawyer before incorporating. This helps to ensure that you have as many variables covered before becoming incorporated. Factors such as what can be written off and other tax implications always need to be considered.

CRA’s 6-Question Assessment for Independent Contractors

There may be times when an employee and employer disagree on the employee’s (or contractor’s) employment status. In order to determine if an individual is an employee or an independent contractor, the Canadian government asks six questions. Reviewing these questions can help individuals understand the nature of their employment. The broad categories covered in the assessment are:

The amount of control over work
The right to hire or subcontract work
The ownership over tools and equipment
Financial risk and the opportunity for profit/ loss
The responsibility for investment and management
A contract or mutual agreement with the client

Employers who are looking to ensure that contractors are not considered employees can get more information by reading our post, How Can I Ensure That Independent Contractors are Not Employees?

The difference between incorporated and T4 employment are strikingly different though in practice, contractors sometimes feel that the lines between contract work and T4 eligible employment get blurred. For help with understanding incorporated vs T4 employment, speaking with a lawyer is a good first step. Contact the experts at Soni Law Firm today and see why we are the employment lawyer Toronto contractors and employees can count on.

Book a Free 15 Minute Consultation

About Post Author

Rahul

Rahul founded Soni Law Firm, a boutique employment, labour, and human rights law firm, with the goal of taking his Downtown Toronto litigation experience and making it accessible to Ontario’s Main Street employees and employers.