E20: Should You Hire an Employee?
Welcome back to another episode of Chat with Brandy, a weekly show where we talk personal & business finance, taxes, and how to make money while doing what you love! I’m your host, bookkeeper and tax preparer Brandy Miron, and this is episode 20.
Today, let’s talk about hiring employees, when it’s a good idea and when it’s not and how much it’s going to cost you.
Smart business owners hire for 1 of 2 reasons:
Hiring the employee will generate more revenue for the business; OR
Hiring the employee will save money for the business
The basic math is that the amount of money that goes out to pay the employee plus the employer’s portion of the employee’s benefits (which we will get into more detail later) should be LESS than the amount of revenue that employee is generating OR the amount of money you would be spending if not for that employee. Essentially, onboarding this person should be increasing your bottom line, not lowering it.
Some examples may be – hiring a person who’s work will increase your capacity for revenue-generating activity. For example: If I could no longer take on new clients because my capacity was full, and hiring a new bookkeeper would enable me to take on 20 new clients, that would work in my favor.
Or, if I have been outsourcing production of a product that I’m selling, and I realize that I could hire somebody full-time to make these products in-house for cheaper, that’s another good reason to hire.
If you’re thinking of hiring somebody to take on a very specific task for you in order to free up your own time to generate more income, consider hiring a contractor instead. This can be a good gateway into understanding whether these tasks can really be outsourced, and help you to set up processes and systems in preparation of hiring somebody permanent.
For example, if you’re thinking of bringing somebody on to help you with copywriting and social media marketing, hire a freelancer in that field first – in our gig economy, there are plenty to be found, and you can test the waters before really making the employer commitment.
The benefit to working with a contractor vs an employee is that it is typically cheaper, there is far less paperwork, and you don’t need to worry about employment standards in terms of terminating your relationship with contractor, paying vacation, or withholding payroll tax.
On the other hand, having an employee usually means having a more committed person with your company, being able to use all their skills, and growing together as a team.
Now, there is a fine line between a contractor and an employee, and CRA has become increasingly selective about who should be considered a contractor, and in some cases, may issue a ruling that one of your “subcontractors” was actually an employee, and therefore will consider you responsible for paying CPP and EI for that contractor, as well as any related penalties.
Some of the things to consider when determining if the relationship you have with somebody is considered free-lance or an employee/employer relationship are:
Is the person claiming business income on their tax return? This should go without saying, but avoid “under-the-table” transactions. They only serve to get you and your business in trouble. Any contractor that you are paying should be claiming that revenue as self-employment income. You obviously do not have control over somebody else’s actions, but if they have indicated to you that they will not be claiming this income, I would recommend not working with them.
What level of control do you have over the contractor’s activities? For example, are you requiring them to show up at certain times at certain locations? This is a lot more like an employer/employee relationship than a contractor relationship
Is the contractor providing their own materials and supplies?
Does the contractor have the ability to hire their employees and contractors?
Did you choose the method and amount of pay, or is the contractor invoicing you based on their fee?
Is the contractor able to work for other clients while working for you?
Is the contractor requiring training or direction from you in order to complete the task?
Normally, a self-employed contractor works independently, sets their own times and scope of work, may provide services to more than one client at a time, and there isn’t typically any level of subordination taking place.
If you’ve been down the subcontractor road and you still want to hire, there is one important question you should have the answer to:
How much will this employee cost the business?
The first step to this calculation is to determine how many hours you’ll require the employee to work, and what their wage will be (keep in mind that the minimum wage in Alberta is $15 in 2019).
As an employer, you will be responsible for not only paying your employee on time, but calculating the employee’s personal taxes, CPP (in most cases), and EI, and remitting them on the employee’s behalf. This usually means subscribing to some kind of payroll software or service, which let’s say on average would be about $50/month per employee.
You also need to consider that you as the employer are required to pay additional EI and CPP on top of your employee’s wage.
EI:
For 2019, the calculation is 1.62% of the employee’s wage, up to a maximum of $860.22/year. As the employer, you will be deducting this 1.62% from the employee’s wages on each paycheque, but then you also need to pay your portion of the EI premium. The employers portion is 1.4x the employee’s portion, so for example:
Employee’s gross payroll: $1,000
Employee’s EI: $16.20, which would be deducted from $1,000 and remitted to CRA
Employer’s EI: $22.68, which would have to be paid ON TOP of the $1,000 wage
CPP:
For most employees, you will also need to deduct and remit CPP. This calculation is a little more complex, but basically, after the employee has made $3,500, they pay 5.1% of their wages into CPP, to a maximum of $2,748.90.
As their employer, you match this contribution at another 5.1%. Example:
Employee’s gross payroll (assuming they have already earned more than $3,500 in this calendar year): $1,000
Employee’s CPP: $51.00, which would be deducted from $1,000 and remitted to CRA
Employer’s CPP: $51.00, which would have to be paid ON TOP of the $1,000 wage
Side note: due to the CPP enhancement, this percentage has increased in 2019 for the first time since 2002, and will continue to increase every year for the next 5 years until it is at 5.95%. This is a rather complicated enhancement strategy that deserves it’s own video, so keep your eyes open in season 2 for more details on that.
So, to make something complicated a little more simple - for every $1,000 you are paying an employee in 2019, you will also pay $73.68 in employer benefits, plus whatever fees you are paying for your payroll software or service.
These are base-level costs you will be paying. Depending on what industry you are in, you may also be responsible for paying for WCB for that employee, or you may consider offering health benefits. Your employee may require extra supplies or furniture. I say all of this to encourage you to not only think about the hourly rate you would pay – you’ll need to take a good look at your budget, and really determine whether you have the cash flow to make hiring work.
WCB charges a different rate for every industry, so I can’t give you a firm number for that over a video, but I will provide the link for you to do some research. Some industries are completely exempt from requiring WCB, but even in those cases, you may want to consider offering your employee a disability plan or something of that nature, so consider those costs as well.
If you’ve done your due diligence and you’re ready to grow your team, next week’s video will cover all of the steps you need to take when hiring a new employee, what records to keep, and my recommendations on how to calculate and remit source deductions and file T4s and Records of Employment. Keep your eye out for the show notes for this episode as they will contain many useful links!
It was wonderful to chat with you, and as always, I hope you have a fantastic week!
