CFO Services | Avoiding Payroll Remittance Problems
50% of all entrepreneurs close their business within five years says CFO services and out of all of those businesses who have failed, 29% say that their business failed because they ran out of cash. All too often, business owners who are looking for ways to increase cash flow in their business turn to various methods of saving money that are less than honest. One of those methods is when a business owner decides to pay their employee as a contractor so they can avoid paying them payroll deductions. This is an extremely risky move, because there is a high risk factor at getting caught, as well when they are found out it, that business owner will not only have to pay back the amounts they should have deducted initially, but they will also get charged interest and penalties. This can be financially devastating move for businesses who were trying to save money.
So how can businesses avoid this problem in the first place and said CFO services itís an extremely easy problem to avoid all you have to do is hire employees and take the proper deductions of their pay, or they can hire incorporated contractors and not put them on payroll. Either option is fine, the CRA doesnít care because they get paid either way. The real risk is when a company hires an unincorporated contractor and pays them like incorporated contractor. The problem with some businesses is that they fall into this habit to save some money, then since they donít get caught, they tend to believe itís not a problem and they can get away with it. Just because they havenít gotten caught says CFO services doesnít make it correct. When they do get found out, CRA them with a find so large it could potentially enter their business.
So how does a CRA determine whether or not a contractor is an employee asks CFO service. The single most important factor is whether that contractor risks profit and loss. If they are a legitimate business person, did they have any risk on the line. If they always get a flat hourly rate or flat fee and they never have to buy equipment, are they taking a risk? The second most important factor is does that person get treated like a staff member, or a contractor? Who the planes them, they get trained with the rest of the company or do they have to arrange for training themselves, are they able to hire their own replacement they canít make it out to the job site or does the employer require that specific person to do that specific job? If thatís the case, they may be seen as an employee rather than a contractor. In fact CRA has over 50 questions that they will ask the business including employees, contractors, accountants, as well as the business owner.
CRA will be able to easily determine who is an employee in the business and who is actually a contractor, and when the ruling is not in the business ownerís favour, they will get hit with a huge fine.
Some business owners often bring a problem to their accountant either just after they have been crushed financially by retroactive payroll remittances, penalties and interest because the contractors have been deemed in place by the CRA, or just before that happens says CFO services. Once the problem has gotten to that stage, itís far too late for any accountant to help the business owner avoid that situation. Likely this is a completely avoidable situation in the first place, that business owners can easily avoid happening to them.
The reason why business owners get into this habit of paying employees as contractors, is that they started doing it as a way of saving money when they started their business, and since they hadnít been caught they continue to do it says CFO service. That doesnít make it right and when CRA finds out, that will be a huge problem for that business. The amount that they will get assessed is a huge, all of the payroll deductions that had never been done, for the number of years theyíd been employed, times the number of employees that the business has plus interest plus penalties. That equals a huge number
Luckily it is a very easy problem to fix says CFO services. All business owners have to do is switch the contractors that are actually contractors to employees and start taking off the proper payroll deductions. The only problem with this solution is that it may not be well received by those employees who have been enjoying getting paid the additional deductions. Avoid them thinking the rules are being changed on them, is to wait until they would be getting at pay increase, and use that as the reason why things are changing. Those employees will be happy to just be getting a pay raise, that they wonít mind that things will be done slightly differently. Another way that business owners can make the switch, is to tell those employees that if they incorporate themselves, they can get a raise. Employees might have a hard time swallowing the cost of incorporating themselves and the additional costs that come with that if they werenít getting a raise, but since they will be getting a raise they are often completely fine with that additional cost.
This is a problem that too many businesses falling into, which can potentially ruin their business, which are completely avoidable. By only employees as employees and only incorporated contractors as contractors, as owners can avoid this problem from the beginning, and if theyíve already been making that mistake, it is easily fixed. Thereís no reason says CFO services for any businesses to fall prey to this problem. Business owners are faced with enough problems and hardships these days that they donít need to make things worse for themselves, itís not worth the risk to save such a little amount of money.