For the same payrate, what difference exist between employees and contractors in terms of tax [closed]

Question

This may sound silly but I think I may be under a misunderstanding. I understand that employers don't take off tax from a contractor, so they need to do it themselves. If employers take off tax for normal employees does that mean that if a contractor is getting paid the same rate then the employee is actually making more money overall? For example if both a contractor and employee get paid $20/hr would one be making more?

When job wages are advertised, is this normally before or after tax? Does it make a difference if the position is a contractor or employee?

Aside from pay rate what may be different between employees and contractors, for example I know employees are required to be given time off for holidays but this seems moot as contractors could just take a break before getting the next contract.

Answer 1

You cannot compare the payments at all.

As an employee, you might have a salary of $X per month. You get paid every month. You get paid when you are sick, or when you are on holiday, or when there isn't much work to do. They pay you when you go on a training course, AND they pay for the training. I don't know the Canadian rules, but in the UK the company also pays about the same National Insurance contributions as the employee does, so the monthly cost to the company is actually $X + 13.8 percent (the 13.8 might be slightly wrong).

As a contractor, the company pays you usually a daily rate or an hourly rate. If they don't need you, they stop using your services and don't pay. You usually have a time limited job, so after some short time you look for the next job. You are responsible for all the taxes, health insurance and so on. You have the work filling out tax forms or pay an accountant to do it. You don't get paid when you don't work, because you are sick, you are taking a break, you are doing some training.

As a contractor you should have a daily rate where 120 days pay the same money nominally as 12 months for an employee. So if an employee makes $60,000 a year, you would want a daily rate as a contractor of $500 a day. You will come out ahead, but then you have the risk of being without a job. If an employee complains about how much you make compared to them, tell them to give up their job and become a contractor instead.

I see jobs advertised for permanent positions with an annual salary (from which taxes, pension payment, employee part of the National Insurance need to be deducted to get net payment), and contract positions with a daily rate with the contractor being responsible for all tax and other payments; when the contractor sends in a bill, they often add 20% VAT in the UK, which doesn't matter to the company because they can immediately deduct this from their own VAT bill, and it is not part of the daily rate.

Answer 2

Employees have benefits and paid vacation time, sick time, and other perks.

Contractors need to be paid twice the hourly rate of an employee to be on equal footing. And depending on how you do your taxes and deductibles, you're usually likely to come out ahead.

Caveat being you have to do the extra work of doing your own taxes or hiring an accountant as you'll be doing business tax. Plus the work is not guaranteed.