Here’s why relationship plays a big role
The typical Ontario business doesn’t have to worry about handling the tax requirement that come from a mix of temporary and in-house employees.
However, when you open a staffing agency, you have to learn how to navigate this complex environment. It’s not as simple as putting your temp workers in one box, and your full-time workers in another. Employee classification looks at several criteria to determine whether the people working for your staffing firm should be considered an independent contractor or an employee. The tax code is subject to change, so make sure to look up the latest rules and regulations when you’re filing the necessary paperwork.
It's important to fully understand employee classification to avoid costly fines and penalties. If you end up misclassifying employees for a long time, the fines add up and could unfortunately put you in a situation where you need to close down your business.
Assessing the relationship
One of the biggest determining factors in whether someone is an independent contractor or an employee is the type of relationship they have with your staffing agency. The relationship falls under two categories: contract of service or contract for services.
A contract of service governs the employee-employer relationship. The contract between the two parties indicates that the employee’s services are dedicated to your staffing firm. You have a business-to-individual relationship. On the other hand, a contract for services indicates an independent contractor, who is considered a business in this scenario. They provide your staffing firm with a certain set of services, but they’re not wholly dedicated to working only with your business.
While figuring out which relationship is which might sound straightforward, it might not always be so clear cut. But don’t fret – here are a few questions to ask when it comes to determining your relationship with employees and independent contractors.
Question 1: How much control do you have over the person’s activities?
For example, do they have little control over deciding what they’re going to work on, or where? The more control you can exert over your workers, the more likely they fall under an employee classification when it comes to your taxes.
Question 2: Do you provide the tools and equipment they use on a day to day basis?
If you’re supplying most of the resources they need, they could be considered employees of yours.
Question 3: Are they able to subcontract any of the work out, or can they hire assistants?
If they can choose to bring on additional help as needed to complete the work, they may fall under the independent contractor category.
Question 4: How much financial risk is the worker taking when they sign on with your staffing firm?
Employees have little to no financial risk, as their expenses are covered or reimbursed by the company they work for. Independent contractors, on the other hand, often put their own funds on the line during the course of their work.
Question 5: Do your workers have a lot of responsibility for investing in the work, or in the management portion of things?
When a staff member holds this level of responsibility, they may fall under the independent contractor label. It’s important to note that the tax code also considers the contracts you have drawn up between you and the worker as the basis for your relationship.
Other tax considerations
Are you a freelance recruiter who has transitioned into running your own staffing agency? You have several other considerations to keep in mind when you work on your company’s taxes. For example, you may need to pay the Employer Health Tax, sales tax and other types of taxes that apply to your business structure.
Handling taxes for your staffing firm can be complex, and take up a lot of your time. If you make mistakes, you could end up with an expensive situation on your hands. Not to mention, all of the stress of an audit.
Explore the tax resources for staffing agencies so you can avoid these situations. You’ll want assistance from organizations that understand the Ontario tax code, and have experience with handling a business that sends temporary workers on job assignments while also using in-house staff. And the good news is that we can help!
Contact us today to learn more about our expert back office support services, which include tax administration and tax credit support.