How would you describe yourself?
What is your favorite thing about working at Homeroom?
What are your ultimate personal goals?
- Marry Bruce Willis
- Live in a big pink castle
- Get a pink winged unicorn (or a pegasus/unicorn? A pegicorn? a unisus?).
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.
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.
The CRA may chose to review your business at anytime however there are some common factors that usually trigger an investigation.
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.
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.
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.
Your worker at any point can request a ruling if they feel that you are paying them incorrectly.
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.
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:
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.
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.
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.
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?’
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.
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.
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))
The word supplies is limited to materials that are used up directly in the performance of the duties of the employment.
Supplies do not include:
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.
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.
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.
1093 W Broadway #105, Vancouver, BC V6H 1E2
Call us at (604) 739-9536
Hours: Monday – Friday: 9am to 5pm