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E-Myth – “Why most small businesses don’t work & what to do about it”

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CFO Services | Hiring Mistakes

The biggest mistake that business owners can face in their business while hiring says CFO services is by hiring employees as independent contractors. Business owners often only realize how huge the error they made was after they have been audited by CRA and assessed to pay tens of thousands of dollars in retroactive source deductions including interest and penalties. This is an extremely unavoidable mistake, that business owners can avoid by putting a few simple rules in place.

Entrepreneurs often get lulled into a false sense of security when they first start their business and make this mistake, saying theyíve been doing it for a long time and have never had a problem. But the problem with that says CFO service, is that it actually is a problem but it just hasnít caught up to them yet. When it does, it will be completely catastrophic for their business. Just because theyíre getting away with it, doesnít make it right. It will work until it doesnít work anymore, and when it doesnít work their business may be financially crippled or even ruined.

This is a totally avoidable error by putting some hiring practices into place that says if they hire a contractor, they will ensure that contractor has been incorporated. When the business hires an employee with the correct source deductions, CRA has absolutely no problem with that. When a business owner hires an independent contractor who has been incorporated, CRA has absolutely no problem with that. The problem happens says CFO services is when a business owner there is an independent contractor who is not incorporated. The CRAís main goal is to ensure that they get the taxes that they are due. The hiring unincorporated contractors, CRA does not collect those taxes properly, which is a problem. They will audit businesses that are suspected of hiring employees as unincorporated contractors. This means a business owner is using them like an employee but not paying taxes on them.

There are significant differences between contractors and employees in business. Contractors are legitimate business people, who take on real risks and rewards when they choose to become a contractor. They have to buy their own equipment, pay their own bills, they take on risk in their business, and they have the potential to lose money. Also they have a certain autonomy within their job. They are able to set their own hours, hire their own replacement to do the job, pay their own insurance, and build their time. Employees on the other hand donít have to pay for any of their bills, or by their own equipment, they get trained by the business owner, are not able to find their own replacement for the job, they are covered under the employerís insurance, they get hired on to do a job for a set hourly rate. Basically CRA is determining what that contractors risk of profit and loss is says CFO services, and what is the business ownerís control over them?

All too often, business owners make crucial errors when it comes to hiring for their business, believing that they can save themselves money by hiring employees as independent contractors says CFO service. Once CRA finds out about this error, business owners go to their accountants when they are about to be decimated financially by retroactive payroll remittances plus penalties plus interest all because there contractors have been deemed employees by the CRA.

But why is this such a problem? The reason is says CFO services is because when an employee is paid as a contractor, the business owner does not take off the source deductions from their paycheck, and CRA does not get the taxes that they are owed. CRA is very serious about ensuring that businesses pay those taxes. Small business owners get a significant tax break from 48% as the top personal tax amount in Alberta, to 11% as a small business owner. CRAís job is to ensure that they collect on that 11%. It is considered a huge problem if businesses are avoiding paying taxes.

If business owners get assessed as having hired employees as contractors, it can be enough to ruin their company. For each contractor that has been deemed an employee by CRA, the business owner must pay the source deductions retroactively to the beginning of their employment plus interest plus penalties. Depending on how long a business owner has been doing that for, and how many contractors they had hired, that amount could be absolutely huge, in the tens of thousands of dollars at a minimum.

A great way for businesses to avoid this problem, is to hire employees and take the source deductions of their paycheck, or if theyíre going to hire an independent contractor, make sure that they are incorporated. By doing this, business owners can completely eliminate this risk in their business says CFO services.

If business owners have been doing this, and want to eliminate that risk later on in their business, it is very easy says CFO services. All they have to do is either switch there contractors to employees, or ask those contractors to get incorporated. If they do this at same time they are eligible to receive a pay increase, most people will be unbothered by the change. Often employees will have no problem with starting to get source deductions taken off their paycheck if they know that they will be getting a raise. And if contractors are going to getting paid more money, they will have no problem incurring the charge to incorporate themselves.

Entrepreneurs can easily avoid this problem from the beginning in their business if they follow rules about how they hire. And entrepreneurs can easily and instantly fix this problem if they have decided they want to avoid the risk you pay for that theyíve been engaged in. There is no reason why a business owner should have to get audited by the CRA and incur massive penalties that can only be detrimental to their business, but has the potential to force them to close their business completely.