Contractor and Subcontractor Expenses

Many small businesses rely on contractors or subcontractors to get work done — whether it’s a web designer, a plumber, or a freelance bookkeeper. The good news is: payments to contractors are usually fully deductible. But to stay compliant, you need to track them properly and understand how they differ from employee costs.

Contractors vs. Employees

This distinction matters for taxes and payroll:

• Employees: You withhold and remit income tax, CPP, and EI. You also issue T4 slips.
• Contractors: They handle their own taxes. You pay their invoice, and in some cases issue a T4A slip (Canada) or 1099-NEC (U.S.).

👉 The CRA has strict rules for determining whether someone is really a contractor or an employee. Factors include control (who decides how and when work is done), ownership of tools, risk of profit/loss, and degree of independence. Misclassifying can lead to penalties.

What You Can Write Off

Payments to contractors and subcontractors are deductible business expenses, including:

• Hourly or project-based fees
• Retainers or deposits
• Travel costs if covered under contract
• Supplies or materials reimbursed to them

If a contractor charges GST/HST, you can also claim the input tax credit — provided they include their GST/HST number on the invoice.

Keeping Proper Records

The CRA requires proof of contractor payments. That means:

• Invoices: Every payment should be backed by a proper invoice from the contractor.
• Contracts/Agreements: Written agreements are best practice, even for short-term work.
• Payment Records: Bank transfers, e-transfers, or cheques provide a clear audit trail (avoid paying large amounts in cash).
• Tax Slips: If required, issue T4A slips to contractors you paid more than $500 in a year (Canada).

Common Mistakes to Avoid

• Paying “under the table”: Cash with no record = not deductible.
• Not collecting contractor info: Always get their business name, address, and tax ID/GST number.
• Mixing employees and contractors: Treating an employee like a contractor to avoid payroll is risky — the CRA can reclassify and charge you back taxes.

Best Practices

• Keep a contractor file with agreements, invoices, and receipts.
• Record each payment in your books under “Contractor/Subcontractor Expenses.”
• Review contractor costs annually to see if outsourcing is still the best option.

The Bottom Line: Contractor and subcontractor payments are fully deductible — but only if you document them properly. Clear invoices, contracts, and records keep you compliant, maximize your deductions, and protect you if the CRA asks questions.

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