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Hi there and welcome to another edition of ask spurl CPA. Today we’re talking about contractors versus employees. And I have a y’all way here again with me to help discuss this topic. Uh, the quote that I’d like to start off with is, you know, Michael Gerber, the author of our favorite E-myth, the fatal assumption is if you understand the technical work of a business that you understand the business that does that technical work. And the statistic, you know, one of our, uh, most uses 50% of all businesses go out of business in five years and you know, roughly a third of these businesses go out of business because they run out of cash. Hire a CFO Edmonton, so the, the story that we have are business owners. They come to us, you know, after they’ve been crushed or they’re about to be a crushed financially by retroactive payroll, remittances, penalties and interests because they’re contractors are going to be deemed as employees by CRA.
So you always, what are the important questions that you think these entrepreneurs should be asking? Can’t? Well, I do like this one. Why do you say hiring an incorporated contact is a lot like smoking. So, um, you know, business owners, they’ll come to us and say that, uh, you know, I’ve been doing this for a year, I’ve been doing this for three years, or it’d be doing it for five years or even 10 years. And they’ll say, I haven’t had a problem yet. And I say, well, what if someone was smoking for a year or three years or five years or 10 years? And they’re telling you I haven’t had a problem yet. The problem with that is that eventually it catches up to you and when it does catch up to you the results or are, you know, often catastrophic in nature, um, or they can be catastrophic in nature.
So just because you’ve gotten away with it for a few years or you got a friend who’s gotten away with it for a year, that is a very small sample size, the odds are not great on this issue for you and it, you know, it’ll work to a point until it doesn’t. And when it does, they’re going to go back, not just go forward. And those results, the financial implications of having to go back and pay those amounts are often catastrophic or you know, completely end of days type of thing for that business, if not, you know, at least, uh, a really challenging time. Right. Hire a CFO Edmonton, so how can do, makes us successful companies avoid this issue altogether. So big successful companies though that a lot of the time they’ll realize is you bring someone on as employees here. He loves that they’re gonna get their share of tax and it’s, it’s really easy.
And then they realize also if you bring on a incorporated contractor, cra kind of doesn’t care about that either. You know, they’re there, they’re going to accept that relationship as well. All the risk is when you hire an unincorporated contractor. So employee, no problem, incorporated contractor, no problem. Unincorporated contractor. Here’s where all the is. So big companies who, you know, want to spend their time on bigger and better things and uh, you know, having a payroll audits or rulings as they call them, done, they just say, forget it. We’re not going to hire unincorporated contractors. So if you’re out there and you’re worried about this issue and you, you, you want to spend your time on bigger and better issues, you can follow one rule and not watch the rest of this video is don’t hire unincorporated contractors cause all the risk is Irene unincorporated incorporated contract.
As you hire them on as employees or contractors who have their own corporation set up, you know, all the risks then is passed to to them, right? So it’s all the risk is hiring unincorporated contractors. There’s a lot of big successful companies out there who we’ve completely just obliterated this issue by refusing to hire them. So why do you, uh, why do you think intrapreneurs seven natural false sense of security on this issue? So I’ll attempt to, to dive into the psychology of entrepreneurs. And I think a lot of entrepreneurs, if they’re successful, they’re wired the right way because they’ve, Hire a CFO Edmonton, they’re, they’re good at influencing people, you know, they’re good at, they have to be influenced their employees, they stay on task with their problem, vision and mission and the other good at influencing your ideal and likely buyers to purchase from them. So they’ve been online and they’ve read a couple of considerations on if you’re a contractor or if you’re an employee and they think if you make a really passionate, logical argument that, uh, they’re fit, they’re safe, it’s no problem.
The problem is, is that anybody can make a real good, passionate, logical argument on both sides of the fence. So this issue, um, and you know, it’s, it’s, it’s probably not going to, the actual ruling processes is not really going to go down the way they think it’s going to go down. Right. They think if they can come into our office and make a good argument that somehow cra is going to have to buy into that argument, then if not, they’re going to have opportunity to close and close and close again. That’s not how it’s going to work. So, uh, well how do you see Ra auditory see intrapreneurs and what will the process look like? So, yeah, that same, uh, you know, successful well accomplished entrepreneur who used to be able to persuade people, the cra views them as a vacuum cleaner salesman going door to door.
They, they, their sole job as this area honors to do this ruling over and over and over again. It’s like you’re a telemarketer or you’re, uh, you know, the, the king from a Nigerian company country who emails you and once your, for your account details, they just see this over and over again. Entrepreneurs making the argument that no, these people who are working for me are in fact contractors and not employees. Hire a CFO Edmonton, and the process is gonna go vastly different than most. Most entrepreneurs think it’s going to go. Like, um, they’re, they’re going to call up and they’re going to get some details and sometimes you don’t know that they’re calling on this issue. They’re just going to call and ask to speak to the people and you know, uh, they’re going to see the person on the phone who’s a contractor, who is the receptionist in the business.
Um, you know, and they’re going to gather details in their adventure, going to gather it and writing, or they’re going to do a phone interview or an onsite interview often with the owner. And they’re also going to isolate a couple of these so called contractors and ask them the questions. So it’s not just what the entrepreneur says, or even the accountant says. Lots of times they’re going to get to the actual contractors, uh, to, uh, and there’s really no way around that sometimes. Um, and, and what they’re going to do is they’re going to sit there with a clipboard and they’re gonna say, yeah, you’re making your big passionate speech about why these people are guarded. Yeah. Got It. Okay. Okay. Okay, I got it. Well, here’s what I’m going to do. I’m going to look into this issue and evaluate all the facts and we’ll get back to you.
Um, and then they’re going to send them back the thing and saying that, no, these people are, uh, employees, uh, please pay us $78,000. Um, and, and that’s how it’s gonna work. Um, and they don’t care about your passionate about this issue. They’re going to send that to you in writing and they never have to speak to you or hear from you ever again. And they’re going to move on to the next file tomorrow. Okay. And their sole job is to, you know, be very judicious on who they accept as a contractor because ultimately Siri wants a blaze cause that’s where they collect their taxes from. Um, so it’s, it’s a very heartless process. Um, and they’re going to sit there and agree with you. They’re not agreeing with you. They’re just getting onto the next question. Um, they’ve already heard, but they want to hear.
Um, and then they’re going to submit their ruling to you in writing and you’re going to have to pay the bill and no matter how passionate that argument is. So, Hire a CFO Edmonton, that’s what that process looks like. And it’s kind of disappointing ones. The ones business owners see how that looks. Okay. Um, well, uh, I think you’ve touched on this a little bit. Um, what will normally happen if contractors are deemed employees? Yeah, they’re going to have to go back and they can collect tax so they can, um, you know, uh, say that we have to pay the withholding tax, generally they’re not going to go after the withholding texts. They’re generally going to go after the CPP and Ai. So all of those employees, um, that, uh, you haven’t been paying as if that you’ve been paying as contractors. When Siri really views them as employees, they’ll, they’ll say, hey, we don’t just want you to change this moving forward, but we want to go back a year, two years, seven years, and you have to pay the CPP and Eei that you would have deducted from their checks.
Um, which I mean, and they’re going to ask for both sides. So the employee and the employer. So the, even the CVP that you could have deducted off their check if you were doing it right the first time or the Eei, you could have deducted off their check. They’re going to ask for, um, you know, for both of it. So that can be, you know, five, six, 7,000 bucks and employee plus penalties and interest times by the number of years, you know, times by the number of employees times by the number of years. So you can just start to say, okay, seven employee, 7,000, an employee times five employees over the last three years that you start to get a real big number that this comes out to. Um, and it can be really ugly. That’s scary. How do the amounts involved contract with you to the risk factor? So there we have to be, you know, I always recommend class be pragmatic about this, right?
You know, do you have one contractor who you’re paying a few hundred dollars a year and maybe there are some risks, you know, maybe there is some question of whether they’re a contractor or an employee. There’s also risk of running payroll to all the time. Um, or how integral is this, you know, a person as well. So it, you really have to be, I think you have to be pragmatic to, uh, you know, evaluating this risk. You know, is this in my driving 63 kilometers an hour in a 60 zone or have I just gone on a big grand theft auto mission, um, and stole a car and drove it through the airport. Hire a CFO Edmonton, so I mean, it’s, it’s like that with the amount. So you gotta look at this, what’s the aggregate amounts, uh, that I’m paying these contractors where there’s a risk factor? Is it a couple of hundred dollars a payments throughout the year?
Even the CRA auditors will usually turn a blind eye to 500 bucks. They usually have a $500 threshold and their audit procedure for contractors. So you’ve got a couple of hundred bucks a year, what’s the big deal? But if you have several thousands of dollars a year, as you know, 50, 60, a hundred thousand dollars a year in payments to unincorporated contractors and you’d be doing it for years, that’s when your risk starts to get high. Well, in your experience is the risk of profit and loss and important factor. It’s probably the single most important factor. So what they’re doing is you have, there’s a lot of considerations on questions, you know, specific questions that are going to ask. So you have your own insurance. Yeah. Um, do you have other customers? But like what is their risk of profit and loss? You know, when you legitimately operate a business, usually if it goes well, you profit and if it goes poorly, you have the chance to lose money.
And they look at these, you know, so called contractors and say, is there a risk that they could actually lose money? Doing this, as strange as that sounds is that’s one of the, you know, the most important risk factor. And so all of those questions lead back into that. Um, you know, that rationale is, is, you know, is this personal legitimate business owner with a, uh, you know, a chance for profit and the risk for loss, or they simply just get paid as, you know, a lot amount per hour or a flat amount per service. And there’s, there’s never a way that they’re going to lose money and they never, they never have to buy any equipment or supplies or pay anybody else. So. Okay. Well, um, in your experience and as controlling important factor that controls probably number two, so risk of profit and loss is one and then controls number two.
So you know, what’s going on with this, uh, so called contractor. Do they, are they responsible for their own training? Did they train themselves or are they sitting in your staff meeting every Monday? Um, you don’t, can they hire a replacement to do their job or are you assisting on that particular person doing that work? Much like you would with an employee? So, you know, we go with the order of, you know, it’s the risk of profit and loss and then, you know, followed by control. Okay. Hire a CFO Edmonton, what sort of questions will the auditor’s ask? So they’re going to drill it through, you know, things like, does this person have any other clients? Uh, do they, uh, you know, the list of questions is huge. I mean, I, I can pull a list of questions from an audit and it’s probably 50 questions long, but some of the bigger ones, you know, are, um, does this person have other customers?
Do they have their own insurance? Are they responsible for what costs? Are they responsible, you know, they buying materials, are they being supplies? Uh, can they hire a replacement is huge, is huge. Right? And they dive into the, the training of WHO’s training them, how is the hours and the schedule set, you know, is the, are you setting that schedule for them and the hours, um, did they bid on the project to begin with or did you just tell them how much they were making? Did they get an opportunity to tell you, you know, state their price and then you say yes or no to that price? Or we were like, this is the price, take it or leave it type of thing. Um, so those are the types of questions that they’re going to ask. And it’s all the questions are pretty much going back to what’s the risk of profit and loss with this person and what sort of, what level of control do you, how over them?
Okay. Um, why are paying creases a good time to re evaluate risky contractors? So, I mean, you might know you have a risk and you see this risk and you, you know, you want to, you know, start, you know, getting rid of this risk and eliminating this risk or reducing the risk level. Hire a CFO Edmonton, but at the same time, switching people from contractors to employees, you know, sometimes it can be extra costs and sometimes it can be not well received by the people who have been contractors for a significant period of time and now you’re changing the rules of the game on them. So what we’ve seen is, you know, when there’s an opportunity to reevaluate their pay, they’re getting a raise. Um, so once there, you know, do for that incremental increase in that can be a time where you can move them and change their classification from contractor to employee.
Um, and it’s well received because they view it as their raise rather than, um, you know, you’re changing the mechanism that they’re paying them. So, um, that can be an opportunity. Obviously you still have the risks for as long as this person’s, uh, uh, questionable contractor and now they’re, uh, um, uh, you know, until they’re an employee or till they’re incorporated. You could also tell them when they’re due for a raise and say, hey, look it, here’s, um, if you want to make more money, you have to incorporate, or I’m not going to pay you anything else. Right? Like, it was a lot that tends to go over, Hire a CFO Edmonton, a little better than just telling people, um, you know, I want you to incorporate an and incur that extra cost and incorporation, but I’m not going to pay you anymore. Um, so you can do it in conjunction with a race. Sometimes you can not rock the boat as much as if you just do it out of the blue. So, so I think that’s what we have here today for this episode. You know, thanks again for tuning in. Please hit that like and subscribe button and a, you don’t leave any questions that you have below and uh, we’ll try to address them in any future videos. Thanks very much.
