Accounting • Proven • Driven
How to Pay Casual Labour and Enter it into the Company Accounts
Casual labour in Canada was and is generally defined as the performance of a service to or for a Company on a temporary or part-time basis. Examples of what people think of as casual employees might be the kid who mows the lawn in front of the office once a week, janitorial staff, the spouse of the owner who just comes in occasionally to provide administrative relief, or the guy who sweeps up the construction site. Their pay cheques were minimal, and they may even have been traditionally paid in cash. If you employed an individual to work for a few hours on an informal or intermittent basis, and they were not on your staff payroll, you utilized “casual” labour as a “cover all” category. This was fine until about 10 years ago when the Canada Revenue Agency (CRA) stopped accepting “casual labour” as a valid expense in Company Accounting.
Since the rules for Casual Labour changed in Canada, the only two employment options available for tax filings are “subcontractor” or “employee” and in either case, an employer must have the individuals’ social insurance number on file. Low income employees are often exempt from CPP and income tax deductions due to the low level of income. However, EI premiums are always applicable from the first dollar earned. In the “old days”, EI was subject to a minimum number of hours worked but that exemption no longer applies. If they are employees, then they are always subject to at least a statutory deduction for EI premiums.
Additionally, if an individual is to be considered a subcontractor, the company must obtain an invoice describing the services rendered after the completion of the work. If a person earns more than $30,000 per annum overall as a subcontractor, then he/she must be assigned a business number and register for the Harmonized Sales Tax (HST) or Goods & Services Tax (GST). Those in the construction industry also need to issue subcontractors a T5018 since the CRA is trying to crack down on unrecorded revenue being paid under the table.
Other Usually, subcontract work is for a unique project or specified time frame. If payments for subcontract work to an individual are of a recurring nature, the CRA will often seek to recategorize this individual as an “employee” and if CRA is successful in doing this, the company is exposed to interest and penalties for unremitted Employment Insurance Premiums (EIP), unremitted Canada Pension Plan Contributions (CPP) and unremitted Income Tax (IT) withholdings, in addition to being liable for the unremitted payments. Hence why “Casual Labour” should no longer be considered as a concept or option for Canadian Companies – and why “Subcontractor” should only be used in qualifying circumstances as the responsibility remains with the paying Company to get it right – and the penalties applied potentially outweighing any misconceived “benefits”. Due to Provincial Labour acts, you might even end up having to pay them stat holidays too!
The risk of being assessed non-compliant is potentially having to pay the employee plus the employer’s portion of the EI/CPP premiums and the penalties for non-compliance (generally 10% to 20% of the amounts not remitted). Whilst the risk tends to be low for employees only earning a few hundred dollars per year, the risk is still there so must be considered.
There will also be issues related to the deductibility of wages paid in cash because of the difficulty in providing appropriate evidence to CRA to support the expense claim - Paying casual employees “under the table” might seem quick and easy but the problem comes when the business pays it out as casual labour and then tries to deduct it as an expense later on. The money still has to come out of your business but the person receiving the money is expecting not to pay taxes on it unless they receive a T4.
If you are withdrawing cash to pay casual employees under the table so they don’t have to declare it, you still have to pay tax on that as a business owner except now you are at a disadvantage because you won’t be able to expense it. Generally, when there is somebody down the line that doesn’t want to declare something it is always the business owner that gets hurt in the end…
Not being able to expense the employee work is only one of the various things the business owner can get in trouble for. For example, if you have a subcontractor and they are doing something that represents your business, they need to be covered for Worker’s Compensation.
If you’re hiring someone to do a specific task that is not an employee, they are not automatically covered under your plan, so you need to make sure that individual is covered. Just because they are invoicing you doesn’t mean they are paying for coverage. If they aren’t, it is still the contracting business owner’s responsibility to make sure they are covered.
The Worker’s Compensation board do audits on companies where they notice a bunch of subcontractors that have been paid and they request proof that they had coverage. In some cases, we’ve found that business owners aren’t even collecting business numbers or social insurance numbers for these people so you can bet that the workers aren’t being covered. If this happens and you’re audited by Worker’s Compensation, you’ll be forced to pay for that coverage too.
Whether you use casual labour to complete a specific project, employ seasonal help, or occasionally hire part-time help to fill your staffing needs, it is important to consult with your accountant to ensure that your business is accurately categorizing employees so as not to attract unwanted attention from the CRA and others.
At Green Quarter Consulting - Accounting and Bookkeeping Services for White Rock, South Surrey, Langley and Surrey BC, we are here to help with your Casual Labour and Contract Employees. We can assist with guiding you through your bookkeeping and accounting needs to ensure your Small Business in White Rock or Surrey BC handles these casual labour issues correctly.