By Tom Manley
A few years ago, a young man offered to work for me for cash under the table (which I did not accept) at a rate that could have saved me money and saved him income taxes. I witnessed another situation where a professional employee converted from a wage payment to a service contract with invoices to save both parties some money. A consulting client recently asked me how to handle two part-time farm employees – on payroll or service contracts with invoices.
It is tempting to save a buck and the paperwork by hiring workers for cash or by invoices. Besides being morally and legally wrong, cash and contract work are also against the interests of the employer and the worker. The list of arguments against cash work and contract work is very long and we will only cover a few issues in this article.
The biggest issue is the legal consequence of non-compliance. A minor workplace injury may go unnoticed by authorities, but a significant accident brings WSIB into an investigation. Their investigation can expose the illegal situation and everyone would be in trouble, leading to fines or worse. Even a random tax audit of the worker, the employer, or the business owner can uncover illegal work arrangements and leave people with hefty back-taxes and fines.
The case of the contract professional mentioned above was uncovered in a random CRA inquiry. The contract worker faced accrued payments of EI premiums, WSIB premiums, CPP contributions, and income tax payments because of disallowed self-employment business expenses. The situation would have passed the sniff test if the contractor had multiple clients, but he only had one, so the situation was deemed to be a disguised employment to avoid regular wages.
Consider again a workplace injury. Cash and contract workers face complete revenue loss if they cannot work, or the absence of compensation if they cannot earn the premium wages in their field of expertise. Cash and contract workers also forfeit employment insurance, statutory holiday and vacation pay, and CPP retirement earnings unless they make a voluntary CPP contribution.
Cash and contract workers should consider that a normal employer pays wholly or partially the costs of vacation pay, statutory holiday pay, WSIB premiums, sick days off, EI premiums, CPP contributions, and any supplementary health insurance.
When a worker offers a wage without the employer taxes and contributions, then the employer wins but the worker loses a lot. That situation is called exploitation, even if the worker is willing which is usually out of simple ignorance of their rights.
The employer’s cost of employment is in the range of 18-22 per cent on top of the hourly wage. A cash or contract worker should add that to the hourly compensation that they are seeking. The employer would have paid for it anyway. Therefore an hourly wage of $15 becomes a cash or contract rate of $18 or more.
While the worker is not handing any money over to the government, no one is saving any money. The worker still needs to mount their own savings plan to cover injury, unemployment, retirement, health costs, holiday time, and unpaid days off. This may be wishful thinking because few people actually have a savings plan. The extra income is probably spent on day-to-day life, leaving nothing for a rainy day. Looking across the street, the wage worker still has income during an injury, unemployment, and holidays.
In this modern era, cash workers have great difficulty spending cash earnings. Our economy is digital with electronic payments for rent, automobiles, etc… Cash workers need to launder their cash earnings to make bank deposits and credit card payments. A random CRA audit would readily uncover the cash earnings and put the worker into trouble and big debts in back taxes.
Contract workers also face the taxman with respect to HST. The HST exemption threshold is only $30,000 income, and is not being adjusted upwards with inflation. While exempt, the worker does not charge HST on their invoices but must still pay HST on work expenses.
The contract worker registers an HST number either by obligation over the threshold of $30,000 income or in the interest of claiming HST refunds on work expenses. The worker is then stuck with bookkeeping tasks and regular remittance reports. The regular HST remittances can also be a shock. Imagine trying to remit the HST to the CRA when you have already spent it; it requires discipline to put aside the HST earned.
The same cash squeeze occurs in April every year. The contract worker should make voluntary or anticipated quarterly payments to CRA for income tax and CPP contributions. Invariably, they do not make enough anticipated payments. When the tax bill arrives in April, the money is already spent and it is a struggle to pay the bill. On the contrary, the wage worker often sees a tax refund depending on the various deductions and rebates.
The list of issues goes on. The bottom line for workers and employers is simple – get on the payroll.