Business owners get to claim their payroll expenses and employee benefits as deductions on their tax returns. Claiming these deductions is fairly straightforward, but there are some nuances you should help your clients to understand.
Salaries for Employees
Business owners can write off their employees’ gross salaries as business expenses. To explain, imagine an employee earned $1,000, but after his employer deducted Canada Pension Plan contributions, Employment Insurance premiums, and income tax, his cheque ended up being $850. In this situation, your client should claim $1,000 as a business expense.
CPP and EI Contributions Made on Behalf of Employees
Employers must take their employees’ CPP contributions and EI premiums out of their paycheques and remit those amounts to the Canada Revenue Agency. Then, employers should match their employees’ CPP payments and multiply their EI premiums by 1.4, and send those amounts to the CRA. Make sure your clients know they cannot deduct their employees’ CPP and EI payments as business expenses, as their employees paid those amounts. They can only deduct the matching amounts they paid on behalf of their employees.
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, it can deduct that amount. Similarly, if it gives an employee a watch to reward his service to the company, it 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 its employee’s T4 but doesn’t have to report the value of the watch as income.
Paying Children and Spouses
Business owners can also write off amounts paid to their children and spouses. 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 his children in products from his business, he should not report the value of the product as income paid to an employee. Instead, he should report the value of the product in his gross sales revenue, and then write off the product’s value as an expense.
If a business owner pays another professional to do work for him, he can also claim those amounts as business expenses. For instance, your clients should claim payments made to accountants, consultants, or similar professionals as professional fees. There is an exception for professionals who advise your clients on the purchase of a capital property. These fees should be included with the cost of the property.
Dealing with payroll can be complicated, especially for business owners who are just getting started. To demystify employee deductions, you may want to advise your clients about the basics and recommend some payroll software to them. 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.