As a small business owner it is sometimes tempting to want to pay a part time or sometime employee in cash. When you hire a shop girl to work 5 to 10 hours a week, it can seem like a big inconvenience to pay them by cheque with the proper source deductions calculated. So lets look at the pros and cons of this arrangement.
In this situation, a retail store owner has hired someone to work a few hours. They have been hired to do some cleaning in the showroom and some general office duties during the work week. The worker is making $11 per hour for a maximum of 10 hours per week. It may seem like an easy solution to just pull out $110 from your pocket to pay them at the end of the week. If you were to pay by cheque, you would need to deduct CPP, EI and income tax from the small amount of money they were going to take home. That might only leave them with $80 or so. Plus the time it takes to write the cheque, the possible cost associated with bank fees for writing the cheque, the accounting to record the payment, etc. There are many reasons why it’s just easier to pay cash.
The downside to this situation comes in 2 parts. The first is, as a business owner if you pull this cash out of your pocket (in a literal sense), you are essentially paying this person out of your after tax dollars. This means it is the same as paying them out of the money that was from your income. If you have a retail shop where there are cash transactions and you pull the cash out of the till, you are essentially doing the same thing. When you use petty cash to pay someone in this way, there isn’t any receipt or invoice to justify the cash that went out. So, you guessed it, the cash will be attributed to your income. Depending on your situation, you may be in a higher tax bracket than this part time employee. So you will pay more tax on this money than the employee would have if you had paid them by cheque.
It is possible to pay them in cash and record the transaction with a signed receipt from the business in order to issue the employee a T4A at the end of the year. In this case, they are still responsible for paying the taxes on their earned income. The transaction is not attributed to your income which means you won’t be pushed into a higher tax bracket. As a caution, there are strict rules on whether someone is self employed or an employee. This is something you should discuss with your accountant before making any payments.
Do you have part time or some time employees that you pay in cash? Do you pay everyone by cheque with all the proper deductions? Wondering which situation would best suit your needs? Call (905) 272-4000 to schedule a FREE consultation.