Hiring employees is a sign of success for a small business, but it comes with additional costs beyond wages, and they can quickly add up.
Small business owners just getting started often underestimate the costs and administration that come with hiring. Among them are payroll taxes such as employment insurance (EI) and the Canada Pension Plan (CPP), overseen by the federal government, and provincial programs such as workers’ compensation and employer health taxes. The Quebec Pension Plan, or QPP, is administered in that province.
“Small firms are often shocked by how much an additional job costs them,” says Dan Kelly, president of the Canadian Federation of Independent Business. “All of these costs need to be paid whether your business earns an income or not. They’re profit-insensitive.”
Business owners should budget for these and other taxes so they’re not surprised when the Canada Revenue Agency (CRA) comes calling. Here’s a closer look and the ins and outs of EI and CPP.
EI, as many Canadians know, is unemployment insurance that allows people who recently lost a job to receive temporary financial assistance. Both the employer and employee pay EI premiums, but the employer’s portion is 1.4 times higher, to a maximum that increases slightly each year.
The maximum annual insurable earnings for EI in 2018 are $51,700, and the employee contribution rate is 1.66 per cent, while the employer contribution rate is 2.32 per cent. This means an employee pays $1.66 for every $100 of salary up to $51,700 to a maximum of $858.22, while the employer pays $2.32 for every $100 for the employee, to a maximum of $1,201.51.
EI rates are set to drop slightly in 2019 to $1.62 per $100 for employees and $2.27 per $100 for employers. While the rate drop is good news for business owners, they will start paying higher CPP in 2019.
EI can be trickier than other payroll taxes, especially for business owners who employ family members, says Mr. Kelly. A common mistake business owners make is paying, or not paying, EI on family members who work in the business.
Rules are based on the number of shares the family member owns in the business and the relationship to the business owner. An employee is considered uninsurable if he or she controls more than 40 per cent of the corporation’s voting shares or is a relative, or what’s considered a “non-arm’s length relationship” to the business.
Mr. Kelly uses the example of a daughter working in the business for years who becomes pregnant and wants to draw EI benefits while on maternity leave. Mr. Kelly has seen cases where, even if the business has been paying EI premiums on the family member for years, she is denied EI coverage.
“Some business owners are paying premiums when they don’t need to on family members in the business,” he says.
The CFIB recommends owners who employ family members obtain a ruling from Service Canada to see whether the person is eligible for EI benefits. If a business owner has been paying EI premiums on an ineligible person, they can get a refund for up to three years of the premiums paid.
“We’ve helped thousands of business owners get a ruling and get a refund cheque from the government,” Mr. Kelly says. “This is a very frequent mistake on the part of business owners.”
Canada Pension Plan (CPP)
The CPP, or Quebec Pension Plan for people in that province, allows workers who have contributed funds to receive earnings in retirement. Employers and employees pay equal sums into CPP each year, up to a maximum that rises slightly each year.
The maximum annual contribution rate in 2018 is based on $55,900 in annual income. Both the employee and employer pay 4.95 per cent up to that total, which is a maximum of $2,593.80 each.
CPP premiums will increase to 5.95 per cent for both employees and employers over the next five years.
Know when to hold
With CPP and EI, business owners have an obligation to withhold these costs for the employee and an obligation to contribute on their behalf, says Andrew Zakharia, founder of AZ Accounting Firm, based in Toronto.
“Business owners need to understand their remittance threshold,” which is the amount of CPP, EI and other taxes the employer needs to hold back, including both the employee and employer contributions. They also need to determine how often to pay the remittance, which for most small businesses is monthly. “The bigger your payroll is, the more often the government wants its money.”
Also, you can’t be late. “If you’re late, the penalties are very steep,” Mr. Zakharia says.
Companies that don’t fulfil or comply with payroll requirements may have to pay a penalty, interest “or incur other consequences,” including prosecution, according to the government.
Some small business owners who pay themselves a salary forget to pay both the employer and employee portions of the CPP, or 9.9 per cent total in 2018, says Mr. Zakharia, which can leave them scrambling to come up with the amounts later.
Business owners don’t have to pay EI for themselves but can opt in and pay premiums to receive some EI benefits, such as parental leave or compassionate care to look after a sick parent. Mr. Kelly says there has been limited participation because it requires paying those EI premiums for the rest of your working life.
“You really have to do the math to determine if that will be to your advantage,” he says.
Some business owners pay themselves only in dividends, and not a salary, which means they avoid paying CPP contributions. The disadvantages are they lose out on some CPP benefits in retirement and don’t collect RRSP room.
“Some business owners don’t wish to save for themselves in CPP [and the Quebec Pension Plan] for their retirement. They prefer to use other means,” says Mr. Kelly. “That’s a calculation they need to do carefully with a tax professional."
Be careful with contractors
Some business owners try to avoid payroll costs by hiring contractors, but Mr. Kelly says they need to be careful that the government doesn’t consider the contractor to be an employee. The CRA has been known to challenge contract workers on whether they fall into the category of a personal services business, which means they are considered an employee instead of being self-employed.
“Governments could come and deem the person who you consider an independent contractor as an employee, and then you’ll be hit not only with an ongoing bill, but back premiums,” he says. “That’s something employers need to be cautious about.”
Mr. Kelly and other experts recommend business owners seek professional advice to ensure they’re complying with the laws.
While these services add costs to the business, “our advice is that it’s a lot less expensive than making a mistake,” Mr. Kelly says, “and can save you a ton of money if you were to be audited.”