Determining whether someone is an employee or an independent contractor is a larger topic for another day but once you have determined that your worker is actually a subcontractor, there are still some hoops to jump through.
There are two different slips that you can use to report subcontractor income:
A T4A is a slip that is used for many things like pension income, scholarships, and severance payments but in this case, “Box 48 – Fees for services” is used to record payments (without GST) that you pay to a person who is not employed by you to perform services. Since 2012, CRA has not been assessing penalties for failure to use this form, so it is – in a way – optional. This could change at any time, so it is a good habit to start now. As a benefit, it gives a paper trail for you to justify your deduction and it serves as a reminder to the payee of the amount they received and must report on their own tax return.
If your company is involved in construction activities, payments to subcontractors must be reported on a different slip – a T5018. In this case, there can be penalties of anywhere from $100 to $2,500 for each slip you don’t file or file late. You will need to include the recipient’s name, address, and SIN (or Business Number) along with the total amount you paid them. These slips can be prepared on a calendar year basis or they can be matched to your corporate year. Ask your accountant what is right for you.