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Employee or Contractor: CRA checklist


Vancouver Bookkeeper(s), Tax Return Service Vancouver, Small Business Bookkeepers in Vancouver, CRA, Canada Revenue Agency, employment, employee, contractor, long weekend

Something to chew on over the long weekend……

Looking to hire additional help for your expanding business? Last week, we outlined key questions to ask yourself before expanding your sales force.

We noted that deciding between hiring a contractor or an employee is not as simple as figuring out your personal preference.  The Canadian Revenue Agency (CRA) has a very comprehensive checklist that they use to determine if you should be paying your new hire as an employee or if it is OK to consider them a contractor.

This week, we are going over the checklist presented by the CRA  in more detail so that you can make sure you are paying people under the correct category to avoid nasty fines.

Tip: If you own a store or run an office and you don’t want to hire a contractor through a temporary  employment agency then you need to hire an employee and pay the applicable payroll taxes.

Determine who has control

Do you want to have control over the worker? Will you determine when, how and where the work will be completed? Do you expect them to complete the work personally?

According the CRA ‘It is the right of the payer to exercise control that is relevant, NOT whether the payer actually exercises this right’ so basically, if you have the option in any way, shape or form to control the employee’s time and how they complete the work then they are not considered a contractor.

Tools & Equipment

Who provides the tools and the equipment to complete the job?

If you provide your new hire with the tools and equipment they need to complete the job and are responsible for all repairs to that equipment then you need to hire an employee.

Subcontracting Work or Hiring an Assistant

Can the person who is working for you independently hire an assistant or subcontract out the work you have asked them to do?

 If the answer is no, then as you may be assuming by now, you have yourself an employee.

Financial Risk

 Will the worker be financially liable if they do not fulfill the contract? Does the worker actively market themselves? Does the worker perform a substantial amount of the work from their own workspace? Are they responsible for paying their own employees?

If you answered YES to these questions then you may be able to categorize your worker as a sub-contractor, if you answered NO then you guess it, you need to pay them as an employee.

Responsibility for Investment and Management

Does the worker have any capital invested in their business and an established business presence?

If they do then you are pretty safe hiring them as a contractor so long as the also meet majority of the above criteria.

Opportunity for Profit

Can the worker realize a profit or incur a loss? Is the worker paid a flat fee and incurs any expenses as a loss?

If the answer is NO then you need to hire the worker as an employee.

In the end if you are uncertain about your relationship with your new hire or you can’t distinctively answer majority of these questions with a YES or NO response (because the status of your relationship is unclear) then it is best to contact the CRA and get a ruling before you proceed.

This will save you a lot of grey stress hairs, and costs in the long term.

#ThursdayThoughts: Employee or Contractor?

CRA, Vancouver Bookkeeper(s), Tax Return Service Vancouver, Small Business Bookkeepers in Vancouver, subcontractor, contractor, employee

Tear. It’s been a year. Your small business is growing before your eyes. You stare at your Profit and Loss statement for the hundredth time like a kid who’s been fervently measuring their height against the wall fixedly checks in on their progress, and your eyes fill with water. You really made it.

Your email  inbox is flooded with fan mail. It’s wonderful and scary. You want to respond to all of them, even the creepy ones, you want to be Superman/Wonder Woman/the Hulk combined, deliver on your promise of top-notch service but you need help.

You can finally afford it, but who do you hire: an employee or a contractor?

We recommend that before you hire anyone as an employee you start them out as a contractor for a trial period. This way you can test them out and make sure they work well with you, are reliable and will not steal business from you before committing to a long-term agreement.

Once the initial trial period is over, ask yourself the following questions to give some clarity when trying to determine the best way to proceed with your expansion:

What is the nature of the project?

Will you need to control the time of those who help you and the sequence in which they complete tasks?

  • Yes- Then you need an employee
  • No- Then you can consider a contractor

Are you supplying all of the equipment?

  • Yes- Then you need an employee
  • No- Then you can consider a contractor

Do you need a very specific task completed?

  • Specialized tasks are often completed by contractors however if it is an ongoing specialized task then you may want to consider hiring an employee.

How long will I be this busy?

Do you have a higher workload because you have taken on a short term, labour intensive contract?

  • Yes- Then you can hire a contractor
  • No- Then you should consider hiring an employee

Financial responsibility

Will the payment of the person you hire depend on you receiving payment for the overall contract?

  • Yes- Then you can hire a contractor
  • No- Then you should hire an employee

Training

Do you plan on providing training?

  • Yes- Then you should hire an employee
  • No- Then you can hire a contractor as they should already be trained.

What are the Financial differences

If you hire an employee

  • You must match your employee’s CPP which is 5% of their gross earnings.
  • You must pay 1.4 times the EI amount that the employee pays.
  • You must remit taxes on behalf of the employee.
  • You must supply your employee with the equipment necessary to complete the job.

If you hire a contractor

  • They are responsible for paying their own CPP and taxes.
  • They supply their own equipment.
  • You cannot fire them without paying out the contract, they also cannot quit without finishing the contract.

As attractive as it may appear to hire a contractor over an employee you must make sure that your contractor is considered a contractor under the rules set out by the Canada Revenue Agency (CRA) or you risk experiencing heavy fines.

Stayed tuned for next week’s post where we will discuss the CRA employee or contractor checklist in more detail.

Home office tax deductions

Home Office

Photo courtesy of Sean MacEntee

Do you know how to properly claim your home office as an expense?

In order to deduct expenses, the work space must either be:

  • the place where the individual principally (more than 50% of the time) performs administration or employment duties,or

  • used on a regular and continuous basis, for meeting customers or other persons in the ordinary course of performing the office or employment duties.

If you meet the requirements of either description above, you are eligible to deduct your work space related expenses.

However the following rules apply:

  • Your claim cannot exceed the annual gross income that you generated from your office or employment
  • Your office or employment expenses cannot create or increase your annual loss for income tax purposes.
  • If the expenses related to a work space cannot be deducted in a taxation year, the expenses will be carried forward to the following year. In the case that you are an employee who works from home your expenses carry forward so long as you are reporting income from the same employer.
  • Regardless of whether you own or rent your home, your work space expenses are considered a reasonable portion of expenses you pay for the maintenance of your home. The cost of fuel, electricity, light bulbs, cleaning materials and minor repairs can be claimed.
  • If the work space is part of a rented home, a reasonable proportion of the rent is otherwise deductible. However, no deduction can be made for the rental value of the work space area if you own your home.
  • Consequently, if you are not a commission sales employee expenses on account of capital cost allowance, taxes, insurance and mortgage interest cannot be deducted.
  • If you are a commission sales employee and are entitled to claim expenses, a reasonable proportion of the taxes and insurance paid on your owned home. However, no mortgage interest or capital cost allowance can be deducted.

Calculating the percentage you can claim

1. Determine what percentage of your homes total floor space is taken up by your home office.

Eg. Client A has an office that takes up 10% of the total floor space of thier home.

2. Determine what percentage of your time spent in your home office is for employment purposes and for personal purposes

Eg. Client A is using their office for employment purposes 60% of the time while the remaining 40% of the time it is used for personal purposes.

3. Use these percentages to calculate the percentage of your total home expenses that you can deduct.

Eg. In the case presented 6% of Client A’s  home maintenance costs are deductible  (60% (time used for employment purposes) of 10% (size of the space in relation to the house))

What can you consider supplies?

The word supplies is limited to materials that are used up directly in the performance of the duties of the employment.

They include:

  • long-distance telephone calls and cellular telephone airtime that reasonably relate to the earning of employment income and various stationery items.

Supplies do not include:

  • the monthly basic service charge for a telephone line, amounts paid to connect or licence a cellular telephone, special clothing customarily worn or required to be worn by employees in the performance of their duties, and any types of tools which generally fall into the category of equipment.

Sole Proprietors:

You can deduct expenses for the business use of a work space in your home, as long as you meet one of the following conditions:

  • it is your principal place of business; or

  • you use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients.

You can deduct part of your maintenance costs such as heat, home insurance, electricity, and cleaning materials. You can also deduct part of your property taxes, mortgage interest, and CCA.

To calculate the part you can deduct, use a reasonable basis such as the area of the work space divided by the total area of your home.

If you use part of your home for both your business and personal living, calculate how many hours in the day you use the rooms for your business, and then divide that amount by 24 hours.

If you rent your home, you can deduct part of the rent and any expenses you incur that relate to the work space.

The amount you can deduct for business use of home expenses cannot be more than your net income from the business before you deduct these expenses. In other words, you cannot use these expenses to increase or create a business loss.

Salaried employees:

You can deduct expenses you paid for the employment use of a work space in your home, as long as you had to pay for them under your contract of employment.

These expenses must be used directly in your work and your employer has not reimbursed and will not reimburse you. Also, you must meet one of the following conditions:

  • The work space is where you mainly (more than 50% of the time) do your work.

  • You use the work space only to earn your employment income. You also have to use it on a regular and continuous basis for meeting clients or customers.

You can deduct the part of your costs that relates to your work space, such as the cost of electricity, heating, and maintenance. You cannot deduct mortgage interest, property taxes, home insurance, or capital cost allowance.

If your office space is in a rented house or apartment where you live, deduct the percentage of the rent as well as any maintenance costs you paid that relates to the work space.

Commission employees:

You can deduct expenses you paid for the employment use of a work space in your home, as long as you meet one of the following conditions:

  • The work space is where you mainly (more than 50% of the time) do your work.

  • You use the work space only to earn your employment income. You also have to use it on a regular and continuous basis for meeting clients and customers.

You can deduct the part of your costs that relates to your work space, such as the cost of electricity, heating, maintenance, property taxes, and home insurance. However, you cannot deduct mortgage interest or capital cost allowance.

To calculate the percentage of work space expenses you can deduct, use a reasonable basis, such as the area of the work space divided by the total finished area (including hallways, bathrooms, kitchens, etc.).

For maintenance costs, it may not be appropriate to use a percentage of these costs. For example, if the expenses you paid (such as cleaning materials or paint) were to maintain a part of the house that was not used as a work space, then you cannot deduct any part of them. Alternatively, if the expenses you paid were to maintain the work space only, then you may be able to deduct all or most of them.

If your office space is in a rented house or apartment where you live, deduct the percentage of the rent and any maintenance costs you paid that relate to the work space.

 

 Small Business Consulting