When you are starting up, you simply don’t know what you don’t know. Not to fear, Tom is here! Tomasz Popiel, CPA, CA is Startup Canada’s fearless Finance Director and is a Financial Analyst, Chartered Professional Accountant and entrepreneurial enthusiast based in Ottawa, Ontario. As part of a new monthly finance series with Intuit QuickBooks, Tom will answer your startup finance questions. Got questions? Ask Tom. Submit your questions for next month to firstname.lastname@example.org.
The information in this article is for educational and information purposes only and should not be relied upon for decision-making. Always seek the expertise of a professional advisor or accountant prior to making any decisions.
Q1 – What financial considerations do I need to take into account when considering to hire?
Hiring is a big responsibility and can be the most expensive part of running your business. With this in mind, you need to make sure you are financially capable before making your first hire or an additional hire. Your business needs to have enough cash to pay your employees’ wages, your share of the related taxes, and any other related mandatory costs, such as workers’ compensation or WSIB fees in Ontario. Don’t forget to factor in these additional expenses when calculating the cost of hiring each employee.
Q2 – What are the pros and cons of hiring an employee vs. a contractor?
The line between what makes an employee and what makes a contractor is not always clear. In some cases, judgment is required to make the determination. Luckily, there are some general rules to go by and if you need more information, the Canada Revenue Agency (CRA) publication Employee or Self-employed? offers some guidelines of how to determine a worker’s employment status. It’s important to get this right because the penalties and interest can be hefty if you are wrong. Still unsure? The CRA will give you its opinion if you ask.
Here are some of the general rules:
If your business has significant control over how the work is performed and what work is performed, and the person is more like a subordinate, then they are likely an employee. Consider how integrated the person is into the business – is it really a single contract they are performing or are they working day-to-day on whatever you assign? On the other hand, if your business is only interested in the final product or service and the means to how that is done is not controlled by you, then you have evidence of a contractor relationship.
- Tools and equipment
If the business owns the tools and equipment used to do the work, then that is evidence of an employee relationship. If the person doing the work owns the tools and equipment, then it is evidence of a contractor relationship.
- Financial risk
Employees usually have a fixed salary and/or a known bonus structure, are reimbursed for expenses, and have minimum financial risk in the job. A contractor would control their own expenses and therefore have a higher degree of financial risk and opportunity for profit.
There are many pros and cons to weigh when deciding between hiring an employee vs. a contractor. From your business’ perspective, some of key considerations include:
- Your business must pay 50% of your employees’ Canada Pension Plan contributions and your share of their employment insurance fees. It is therefore more expensive for your business to have employees than contractors in general.
- There are many rules about how much you must pay your employees and what kind of rights employees have. Some of these include requirements to pay overtime, a minimum wage, vacation time or pay, workers’ compensation, and severance pay. Employers must consider and understand these rules before hiring employees.
- The good thing about employees is that generally they will be working only for your business, therefore they may be more dedicated, will have more corporate knowledge, and you have more control and oversight over their day-to-day work.
Q3 – What financial steps do I need to take when hiring my first employee?
First, remember to consider all the costs of hiring an employee. After you’ve ensured you are financially stable enough to hire your employee, make sure you get everything in place to do it properly and legally.
- Ensure you have created a Payroll Remittance account with the CRA. You are responsible for remitting your employees’ and your business’ share of payroll taxes. You can usually remit this through your online banking once you have an account setup.
- Ensure you learn about the timelines required to remit (hint: they are more often than just once a year as part of your business tax return!)
- Ensure you are registered for any workers’ compensation or insurance organizations in your province, such as the WSIB in Ontario. Find out when these fees need to be paid as well.
- Ensure you have in place a means to calculate payroll taxes. Software such as QuickBooks will allow you to do this quickly and accurately at a low cost, but there are many other payroll service providers out there as well. Do your research to find the one that works best for your business.
It’s a little time consuming at first to get everything in place for a new hire, but once you are set up for your first employee, it doesn’t take much time to maintain. Top Tip: Keep good records of everything!
Q4 – Is there anything else I should think about when hiring an employee? Where can I go to learn more?
As an employer, you have some added responsibilities in the hiring process:
- Ensure your candidates are legally allowed to work in Canada. You need to ensure you have the Social Insurance Number (SIN) for each employee before they begin working.
- Ensure you collect a complete TD1 form from your employees to remit the correct taxes.
- You are obligated to protect the TD1 form information of your employees once you’ve received it.
- Provide the CRA and your employees T4 slips after the end of the calendar year.
- If an employee leaves your business, provide a Record of Employment to Service Canada shortly after they go. This will be needed if employees access Employment Insurance benefits.
Once you get past the initial setup of all your accounts and bring your new hires officially on board, the real fun begins — keeping them engaged and happy contributors to the success of your business. Good luck!