Many business owners want to offer competitive pay and benefits but feel that it’s out of their budget. Make sure your business clients know their payroll expenses and employee benefits are tax deductible, which may make them more affordable. Claiming these deductions is straightforward, but there are some nuances you should make sure your clients understand.
Can You Write Off Employee Salaries?
Business owners can write off their employees’ gross salaries as business expenses. An employee’s gross salary is the amount earned without tax or other contributions being deducted. Say an employer pays an employee $1,000, but after the employer deducted Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax, the employee’s cheque is $850. In this situation, your client can claim $1,000 (gross salary) as a business expense. The employer match of CPP contributions and share of EI premiums for employees are deductible, as well.
Deduction for Child and Spouse Employees
Salaries paid to owners of the business are not deductible, but wages paid to their children and spouses can be written off. To claim this deduction, the spouse or children must actually work for the company and the pay must be reasonable for the work and commensurate to what the business owner would pay someone else. If your client pays their children in products from their business, they shouldn’t report the value of the product as income paid to an employee. Instead, they should report the value of the product in their gross sales revenue and then write off the product’s value as an expense.
Tax Deductions for Employee Benefits
When employers pay insurance premiums, provide wellness benefits, or cover the cost of other benefits for their employees, they can also deduct those amounts from their business income. For example, if your client pays $2,000 annually for life insurance premiums for an employee, your client can deduct that amount. Similarly, if your client gives an employee a watch to reward their service to the company, your client can also write off that expense.
Although your clients can write off both of these expenses, the CRA treats these expenses differently in terms of the employee’s tax obligations. Namely, the employer has to report the insurance payments as taxable income on their employee’s T4 slip but doesn’t have to report the value of the watch as employee income.
Writing Off Consulting Fees
If a business owner pays another professional to do work for them, they can claim those amounts as business expenses. For instance, your clients should claim payments made to accountants, consultants, or similar professionals as professional fees. There’s an exception for professionals who advise clients on the purchase of a capital property. Include these fees with the cost of the property.
When you have the right tools and knowledge, dealing with payroll can be rather straightforward and stress-free. You may want to advise your clients about payroll basics and recommend some payroll software, which may save them a lot of time. Make sure they know which expenses are deductible and which records they need to keep so they can claim all their deductions at tax time. It may also help to let clients know about the importance of accurate bookkeeping.
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