Hiring Your First Employee

Hiring your first employee is one of the biggest transitions in a trades business.

For many trades business owners, the decision to hire someone is the biggest transition they face. Working alone means every dollar earned goes directly to you and every decision is yours. Hiring changes that. Suddenly you are responsible for another person’s livelihood, and you are navigating payroll, tax remittances, employment standards, and workplace safety obligations that did not exist when it was just you.

This chapter covers what you need to know before you bring someone on — whether that means hiring an employee or engaging a subcontractor — and the legal and financial obligations that come with each.

Employee or Subcontractor

This is the first question you need to answer correctly, because getting it wrong is one of the most expensive mistakes a trades business owner can make. The Canada Revenue Agency draws a clear distinction between an employee and an independent contractor, and the classification determines who is responsible for income tax, CPP contributions, and EI premiums.

If a worker is an employee, you as the employer must withhold income tax, CPP, and EI from their pay and remit those amounts to the CRA. You must also pay the employer’s share of CPP and EI on top of what the employee contributes. If the worker is an independent contractor, they handle their own taxes and contributions.

The temptation to classify everyone as a subcontractor is understandable — it is simpler and cheaper in the short term. But the CRA does not care what you write on a contract. They look at the reality of the working relationship.

How the CRA Decides

The CRA evaluates several factors to determine whether a worker is an employee or an independent contractor. No single factor is decisive — they weigh the full picture.

Control: Does the business control how, when, and where the work is done? If you set the worker’s schedule, direct their methods, and supervise the details of their work, that points toward employment. If the worker decides how to complete the job and you only care about the result, that points toward an independent contractor.

Tools and equipment: Does the worker provide their own tools, or do you supply them? Workers who bring their own tools and equipment are more likely independent contractors. In the trades, this factor is treated carefully because it is common practice for employees to supply their own hand tools.

Ability to subcontract: Can the worker hire someone else to do the job, or must they perform the work personally? The ability to subcontract or hire helpers points toward an independent contractor relationship.

Financial risk: Does the worker stand to make a profit or suffer a loss based on how they manage the job? Employees are generally paid a fixed rate regardless of efficiency. Independent contractors bear financial risk — if a job takes longer than expected or materials cost more, they absorb the loss.

Integration: Is the worker an integral, ongoing part of your business operations, or do they provide a distinct service that could be offered to anyone? A worker who works exclusively for you over a long period, using your branding and representing your company, looks like an employee regardless of what the contract says.

The Cost of Getting It Wrong

If the CRA determines that a worker you classified as an independent contractor is actually an employee, you become liable for all the CPP, EI, and income tax that should have been withheld — including the employer’s share — plus interest and penalties. The penalty for failing to remit source deductions is 10% of the amount that should have been withheld. For repeat offences within the same calendar year it increases to 20%.

These assessments can go back several years. A trades business that has been using workers as subcontractors incorrectly for three or four years can face a bill that threatens the viability of the entire business.

Setting Up as an Employer

Once you decide to hire an employee, several steps need to happen before their first day of work.

Open a CRA payroll account. You need a payroll program account to remit source deductions. If you already have a business number for GST, you add a payroll account to it. As of late 2025 all registrations must be done online through the CRA’s Business Registration Online portal.

Collect employee information. Your new employee must provide their Social Insurance Number and complete a federal TD1 form and a BC TD1 form. These forms determine how much income tax to withhold from each pay period.

Register with WorkSafeBC. If you are not already registered, you must register with WorkSafeBC before your employee starts work. WorkSafeBC premiums are based on your industry classification and total payroll. You pay the premiums — they cannot be deducted from the employee’s pay.

Payroll Deductions

Every time you pay an employee you must calculate and withhold three things from their gross pay: federal and provincial income tax, Canada Pension Plan contributions, and Employment Insurance premiums.

Income tax is calculated based on the employee’s earnings and the information they provided on their TD1 forms. The CRA publishes payroll deduction tables, and most payroll software calculates this automatically.

Canada Pension Plan (CPP) contributions are shared between employer and employee. The 2025 employee contribution rate is 5.95% of pensionable earnings between a basic exemption of $3,500 and the Year’s Maximum Pensionable Earnings. You as the employer must match the employee’s contribution — so the total cost to your business is the employee’s share plus your matching share.

Employment Insurance (EI) premiums are also shared, but not equally. The employee rate for 2025 is $1.64 per $100 of insurable earnings. The employer pays 1.4 times the employee’s contribution. So for every dollar the employee pays in EI, you pay $1.40.

Remitting to the CRA

Source deductions must be remitted to the CRA on a regular schedule. New and small employers typically remit monthly — the payment is due by the 15th of the month following the pay period. Larger employers may be required to remit more frequently.

Late remittances trigger penalties and interest. The CRA takes source deduction obligations seriously because the money withheld from employees’ pay is held in trust — it belongs to the employee and the government, not to you. Using source deductions to cover other business expenses is a significant legal violation.

BC Employment Standards

As a BC employer you are also subject to the Employment Standards Act, which sets minimum requirements for how employees must be treated. Key provisions include minimum wage requirements, overtime pay for hours worked beyond 8 in a day or 40 in a week, statutory holiday pay and entitlements, vacation pay (minimum 4% of gross earnings), meal and rest break requirements, and rules around termination and severance.

You are required to keep payroll records for at least four years and must post the “Facts About Working in BC” poster from the Employment Standards Branch in your workplace.

Year-End Obligations

At the end of each calendar year you must prepare T4 slips for every employee, reporting their total income and all deductions for the year. These must be filed with the CRA and provided to employees by the last day of February. A T4 Summary accompanies the individual slips.

Accurate record keeping throughout the year makes this process straightforward. Trying to reconstruct payroll records in January for the entire previous year is stressful and error-prone.

When to Hire

The right time to hire is before you start losing work or delivering lower quality because you cannot keep up. If you have been turning down jobs, working unsustainable hours, or noticing that the quality of your work is slipping, those are signals that you need help.

A common guideline is to ensure your business is consistently generating three to four times the cost of the new employee’s total compensation — including your employer CPP, EI, and WorkSafeBC contributions — before making the hire. A new employee typically takes several months to become fully productive, so you need enough financial cushion to cover that ramp-up period.

Watch

Watch this guide to hiring an employee in Canada, covering the key legal and payroll steps every small business owner needs to know.

Practice

Work through this interactive scenario to explore the consequences of different worker classification decisions. Each path teaches a different lesson about hiring in the trades.

Reflect

Think about the workers in your trade or on jobsites you have been part of.

• Based on the CRA factors described above, would they more accurately be classified as employees or independent contractors? What would change if they were reclassified?
• What would the true cost of hiring your first employee be, once you account for employer CPP, EI, WorkSafeBC premiums, and the time required to manage payroll?
• What systems would you need in place before your first employee’s first day to make sure you are meeting all of your obligations from the start?