Business owners who have been avoiding paying source deductions by calling their employees independent contractors often go to their accountant after they have been crushed by high penalties and interest charges because there contractors have been deemed employees by the CRA says CFO services. Unfortunately once CRA has audited that business, itís too late to fix this mistake, the only thing that can be done for the business is to help figure out how to pay that penalty back.
Itís definitely a situation where the risk does not outweigh the reward, even though business owners may have been doing this in the business for a long time and donít actually see it as a problem, just because CRA has not caught them does not mean that itís right. And in fact says CFO services, the longer a business owner has been doing this, the higher the penalty they have to pay will be. If they get audited and found guilty, they will have to pay all the source deductions since the beginning of that personís employment with their business, and the business owner will have to pay for both sides the employer side and the employee side. They will be expected to pay those retroactive amounts For each person that has been deemed an employee instead of contractor as well as interest plus penalties. This amount can be financially devastating. The longer an employer has been getting away with this, as well as how many employees we have.
The audit process will be quick and often wonít go the business owner is expecting. entrepreneurs believe that they will be able to convince CRA to rule in their favour, but the auditorís sole job is to judge entrepreneurs and they do this process without much emotion. CFO services says they have a list of over 50 questions that they will ask the staff, contractors, business owner and even accountant to determine if this contractors should be considered employees. for the most important determining factors they will take into consideration is that contractor has any actual risk factors associated with their job. If there back to legitimate business person, they will have some sort of risk such as having to buy their own equipment, or by insurance. A second factor that will help to make that determination is how much control business owner has over that person. The more control, the more they will be considered an employee. Questions such as can that person hire their own placement if they canít make it in order does a business owner required that specific person to do that specific job will help CRA determine if there employee.
This is a completely avoidable problem that business owners can simply eliminate by ensuring that there employees have sourced elections and their contractors are incorporated, it is also an easy fix says CFO service. business owners can switch those contractors to employees any time and completely eliminate this risk in the business.
Business owners who have been improperly employees as and that contractors can often be in for a world when CRA audits them says CFO services. Business owners do this is a way of saving some money by not having to be a source deductions, And it is a very risky move. Once CRA audits them, and assesses them, they have no options to appeal and have to start paying that money plus interest plus penalties back. This can be financially devastating to business, but likely it is easily avoidable and easily fixed.
Many big successful companies avoid this issue altogether by either hiring an employee, or incorporated contractor. Both are fine, the problem happens when a business owner hires an independent contractor that is not incorporated. The reason for this is when the company hires an employee, and is payable to the, CRA will get their taxes will through source deductions. When a company hires incorporated contractor, when they do their year end, CRA will get their taxes. If the contractor is not incorporated, CRA doesnít end up getting their taxes. And thatís a problem. Just because a company has not been audited before, doesnít mean that itís not coming. It may level some business owners into a false sense of security because theyíve been doing it for so long, they believe they can continue to.
Likely this is a very easy problem to fix says CFO services. They can easily switch their contractors to employees at any time and start to source deductions from their check. Business owners can evaluate their risk by taking into consideration how much they pay those independent contractors each year. If there only paying a few hundred dollars a year to those contractors, thereís likely no big risk involved. The problem comes in when that business owner is being several thousand dollars a year to the contractor for several years.
When they get assessed by CRA, business owner will have to pay not just a penalty, but all of the source deductions that were missed retroactively plus interest plus penalties and for each employee that they have. This can be a financially crippling amount that a business owner will be expected to pay, and there will be no opportunity for a business owner to appeal says CFO services. So the only way to minimize this risk is to ensure that employees are being paid properly, and that contractors that are hired are incorporated. In order to switch those contractors to employees, business owners can either switch their pay and start taking CPP and EI off their check, or they can ask as contractors if they will incorporate themselves demise that businesses risk. It may be prudent for the business owner to wait for the time when they are about to give those contractors raise, in order to entice them to spend the money to incorporate themselves, It may not have any problems with spending money to incorporate, knowing they will be making more money.