Posts

#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.

Employee VS Contractor – CRA Penalties for incorrect worker classification

File:US Navy 080823-N-1328S-003 Steel Worker 3rd Class Michael Featherston and Constructionman Steven Cline, both assigned to Navy Mobile Construction Battalion (NMCB) 133 embarked about the Military Sealift Command hospital ship US.jpg

Over the past month we have been exploring the topic of hiring new staff and how to determine if you should hire your new worker as an employee or as a contractor.

Last weeks post explored, in more detail, the CRA checklist that you need to refer to when determining how your new staff should be classified. Following on from last week, today’s post will outline the CRA penalties that you will incur if you do not abide by this checklist as well as provide you with insight into what might cause the CRA to investigate you.

What you need to know about the CRA

The first thing you need to consider when classifying your workers is that when you are paying them as contractors the CRA is not receiving payroll taxes from your business.

Avoiding payroll taxes may feel like a small WIN. However, you need to remember that the CRA, much like your business, does not like to experience a loss.

The unfortunate difference between the CRA and most small businesses is that when the CRA feels like they may be owed money, they have the power to come after you and make your life very uncomfortable.

Red Flags

The CRA may chose to review your business at anytime however there are some common factors  that usually  trigger an investigation.

  1. When your contractor files their tax return, the CRA may choose to audit them to ensure they have listed the correct income. This will lead to them investigating and interviewing all of the contractors clients which will include you.

  2. The top two expenses for most businesses are rent and payroll. If your return shows that one of your top expenses is contractors then the CRA will more than likely view that as a red flag and investigate you.

  3. Your worker may try to apply for EI and discover they are not eligible due to the fact that you were paying them as a contractor. This could lead to them asking the CRA for a ruling.

  4. Your worker at any point can request a ruling if they feel that you are paying them incorrectly.

  5. Come tax time when you worker discovers they owe money to the CRA for unpaid taxes they may become disgruntled and  request a ruling.

If you are investigated the CRA will interview you and your contractors face-to-face and make a ruling that is based on your answers to the checklist questions that we discussed last week.

Consequences

If the CRA investigates your business and determines that you have incorrectly categorized and paid a worker as a contractor when they should have been paid as an employee, you will experience the following penalties:

  1. You will need to back pay (to the start date of your agreement with the worker) all outstanding payroll taxes INCLUDING  the employee’s portion.

  2. You will also need to pay penalties and interest on the amount that was overdue.

All expenses will be incurred by your business and cannot be passed on to the worker in any circumstances.

The cost associated with the CRA ruling that your contractor should have been an employee can be crippling to your small business. That is why we recommend that you thoroughly read through the checklist and if at any point you are uncertain you contact the CRA and get a ruling.

In addition to affecting your business, the investigation can affect your contractors. If they have claimed a different amount on their return to what your records show, they too will experience penalties.

Lessons

Make sure you encourage your contractors to declare their income correctly. Inform them that you will be declaring the full amount they are going to charge and that you don’t want to see them incur any penalties.

Study the CRA checklist and make sure you are confident that you have categorized your worker correctly. If you are unsure contact the CRA and ask for a ruling, the short term pain will result in long term gain.

Use your common sense, if it walks like a duck and it talks like a duck, chances are it is a duck!!!. So if you hire someone who resembles a standard employee within your industry chances are the CRA will rule that you should be paying them as one.

If you don’t need a full time worker yet the job requires you to hire an employee, hire an on call employee or use a temp agency. Temp agencies include payroll in their fees so you are covered.

We cannot reiterate enough how important it is that you make sure you categorize your workers correctly and that when in doubt you contact the CRA.

 

Self-Employment; The possible answer to your job search woes

Self-employment

Photo courtesy of David Martyn Hunt

In our current economic climate the chances of finding a job doing exactly what you are trained to do, or would like to do, can at times seem impossible. The market is competitive, wages are decreasing and quite often the battle to find the ideal position leaves you feeling deflated and pessimistic.

However, in my opinion it is not all doom and gloom!!

I believe that if you have a marketable skill, and you feel that you are disciplined enough to work from home (to keep your overhead low) you may just be able to create your dream job by going out on your own.

That’s what I did. Now I have 3 employees, 65 clients and enough work to keep me strapped to my computer even while on holiday! (Not that I am complaining)

Don’t get me wrong, starting your own business is not an easy solution but thankfully we are lucky enough to live in a country where the growth and development of small business is encouraged, making it a viable option.

So now that this blog post (which was Item number 433 on my to-do list) has compelled you to take the plunge towards self-employment, the next question I should answer is:

‘What do you actually need to do to get started?’

Here are Teya’s top 3 tips (say that 5 times fast)

  1. Get some memorable business cards printed (I recommend a thick card stock with rounded edges)
  2. Perfect your elevator pitch (describe what you do and your competitive advantage in 30s – 1 min)
  3. START NETWORKING.

How to grow your idea into a business

  • Make sure you tell all your friends and family what you are doing because they will be your first clients.
  • Be persistent and don’t give up hope.
  • When you get your first client, WOW them.
  • Don’t forget to ask for referrals.
  • Talk about your business (even if it isn’t really a business yet!) to EVERYONE you meet. You never know who can give you a huge break.

The best advice I received was from a local successful entrepreneur and Author, Steve Jagger. He suggests that as a new entrepreneur you should always ACT AS IF… you have a hugely successful company even if you are just starting and have no clients.

If you are confident no one will know the difference.

I will never forget the first networking event I went to, I was SUPER nervous and desperately wanted to make a lasting first impression.

I later discovered (through friendships that had formed as a result of my attendance to that event) that I had convinced everyone there that I was very experienced and had a viable company. The actual fact was that I had printed business cards from my computer the night before, and didn’t even have a single client.

I really do believe that the possibilities for success are endless. So long as you are prepared to work hard.

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

The Truth About Meals

meals

Photo courtesy of Nick Nguyen

Do you know how to properly deduct your meal expenses? There are different rules for different people depending on who you are, who you work for, and what your employment contract states when it comes to deducting your meals.

The 50% Rule: The maximum amount you can claim for food, beverages, and entertainment expenses is 50% of either the amount you incur or an amount that is reasonable in the circumstances, whichever is less.

What is reasonable? Ultimately the CRA defines what is reasonable. If you get audited, you will have to prove to the CRA auditor that your expense was reasonable. Is it reasonable to spend $500 on entertaining a client who pays you $50 a year? Probably not.

These limits also apply to the cost of your meals when you travel or go to a convention, conference, or similar event. However, special rules can affect your claim for meals in these cases. See sections on solo travellers and conventions below.

These limits DO NOT apply if any of the following apply:

  • Your business regularly provides food, beverages, or entertainment to customers for compensation (for example, a restaurant, hotel, or motel).

  • You incur meal and entertainment expenses for a Christmas party or similar event, and you invite all your employees from a particular location (note that you are limited to six of these events each year).

  • You bill your client or customer for the meal and entertainment costs, and you show these costs on the bill.

  • You incur meal and entertainment expenses for a fundraising event that was mainly for the benefit of a registered charity.

Claiming Meals For Business

What business gifts are you giving your clients? There are tax implications to the choices of gifts you purchase. Gift baskets (with food in them), gift cards to restaurants and coffee shops are considered meals. Which means they are only 50% deductible to you.

Many businesses supply coffee, tea, creamers, bottled water, juice, pop, snacks, or sometimes alcohol in the office fridge.  In order to claim these you must have a business reason, names of who participated and the reason for consumption.

Also as a  business you are allowed to write off six office events a year and claim a 100% deduction on those events.

For any entertainment expenses to qualify as a business expense, you must be able to demonstrate that the amount was incurred for the purpose of earning income, the onus is on you as the business owner to keep track.

You must have a business reason as well as names of customers or persons being entertained.  For example, if you’re going to spend big money on tickets to a hockey game, keep a record of who you were entertaining and have a good reason for it. The more expensive something is, the more important it is to have a good reason for conducting business.

Never eat or drink alone if you want to write it off unless you are one of the exceptions. Take office breaks with a co-worker, call it team building and you can write it off. Be sure to write on the receipt, who you were with, and what was the purpose.

A cautionary tale: a client was recently audited and asked to provide the name and phone number for each receipt that had been deducted, the client was not able to provide this information, and all the meals were disallowed. It’s all good…until you get audited.

Convention expenses

You can deduct the cost of going to conventions, up to two a year. The conventions have to:

  • relate to your business or your professional activity; and

  • be held by a business or professional organization within the geographical area where the organization normally conducts its business.

This second limit may not apply if an organization from another country sponsors the convention, and if the convention relates to your business or professional activity.

Sometimes, convention fees include the cost of food, beverages, or entertainment. However, the convention organizer may not show these amounts separately on your bill. If this is the case, subtract $50 from the total convention fee for each day the organizer provides food, beverages, or entertainment.

You can deduct this daily $50 amount as a meal and entertainment expense. However, the 50% limit applies to the daily $50 amount.

Food, beverages, or entertainment at a convention do not include incidental items such as coffee and doughnuts available at meetings or receptions at the convention.

Travelling Expenses for Employees

Travelling expenses include food, beverage, and lodging expenses but not motor vehicle expenses. You can deduct travelling expenses as long as you meet ALL of the following conditions:

  • You were normally required to work away from your employer’s place of business or in different places.

  • Under your contract of employment, you had to pay your own travelling expenses.

  • You did not receive a non-taxable allowance for travelling expenses.

  • You keep with your records a copy of Form T2200, Declaration of Conditions of Employment, which has been completed and signed by your employer.

The 12-hour rule: You can deduct food and beverage expenses if your employer requires you to be away for at least 12 consecutive hours from the municipality and the metropolitan area of your employer’s location where you normally reported for work.

Solo Travelling employees

For a solo meal, you need to know if you fit into one of the special categories or if you have a contract that states whether you are required to carry on duties in different places.

As a rule of thumb travel and eat and drink solo at your own peril.

If you do, keep a log of how long you were away, why you were away, and how come you couldn’t get back within 12 hours.

Arrange your meals together with an employee, team member, colleague, client, customer, supplier, or partner to discuss business matters.

Unless you meet the criteria of railway, commission sales, transport, or have a contract to carry on duties away from the place of business or in different places, remember the 12-hours-away rule.


References:

Travel solo at your peril http://www.taxdetective.ca/articles/article/1482041/89556.htm

Canada Revenue Agency

5 common bookkeeping mistakes

Bookkeeping mistakes

Photograph courtesy of Sam Beckwith

1. Ignoring CRA correspondence

Ignoring the brown envelopes from the CRA won’t make them disappear, and chances are that it might not be as bad as you think.

Having someone who is used to reading these letters can ease your mind by deciphering what needs to be done. From experience, being pro-active and keeping in contact will keep you out of trouble, even if you don’t have the money to pay right away.

2. Procrastinating with your bookkeeping

How good would you feel if your books were up to date and you knew how your business was doing on a regular basis?

Having your receipts pile up creates clutter in your office and your mind. The longer you wait, the less likely you are to remember specifics about your income and expenses. Get it done and save yourself headaches.

3. Not paying employer portion of payroll liabilities

Most new business owners don’t know that as an employer, you need to match CPP and EI that is withheld on the employee’s paycheques.

These amounts can add up quickly, and when your T4’s are filed, you will get a bill for the employer portion which could cripple your business. The payroll division of CRA tends to be the most severe and quickest to hand out penalties. Hand over your payroll to a professional.

4. Annual HST filers being surprised at how much they owe

Did you know that one year’s worth of HST could be $10,000 or more depending on your business?

Setting up an HST savings account is a great way to help you budget for the annual payment. If you work with a bookkeeper, they can tell you how much you would owe each month so that you will be prepared. Alternatively, switching to filing quarterly is another option. 5. Self employed person’s obligation to pay CPP Did you know that all self employed individuals are obligated to pay 9.9% CPP (Canada Pension Plan) on all net earnings over $3500? Many self employed people do not earn enough to pay income tax, however they still owe CPP at tax time, and are unable to pay on time. Avoid unpleasant surprises and plan ahead.

5. Self employed person’s obligation to pay CPP

Did you know that all self employed individuals are obligated to pay 9.9% CPP (Canada Pension Plan) on all net earnings over $3500?

Many self employed people do not earn enough to pay income tax, however they still owe CPP at tax time, and are unable to pay on time. Avoid unpleasant surprises and plan ahead.