Employees and the Cost of Owning a Small Business

author-image

Employees and the Cost of Owning a Small Business

As we start to turn the corner on COVID-19, business owners are now finding themselves facing the unexpected challenge of recruiting and retaining staff. In a survey conducted this past summer, 59% of Canadian businesses reported that they cannot find qualified employees to fill vacancies.

As government wage subsidies come to an end, and with the minimum wage set to increase to $15/ hour in Ontario in the New Year, it is critical for business owners to have a solid understanding of the true cost of each employee and their impact and contribution to the bottom line. Below we provide a close examination of what it costs a business owner to create a new job, and the financial risk of adding employees to a business.

New Challenges

COVID has had a dramatic effect on every aspect of our lives, including how, where and when we work. This change has resulted in a power shift away from employers. Many employees, no longer limited by the work opportunities close to their home, are increasingly feeling empowered to seek out new employment opportunities that offer the financial package and flexible work options that meet their personal needs.

Inflation is everywhere at the moment, and wage inflation is also part of the new reality for employers. In addition to having to offer a salary that competes with other opportunities across town, across the province and across the country, employers must also prepare their payroll for the increase in minimum wage. Inevitably, as entry level minimum wage workers receive a pay boost, more experienced staff will also demand a wage increase that represents the value they offer the company beyond the minimum wage worker.

The Cost & Reward of Each Employee

Let’s look at the numbers of hiring a new employee: as most business employers can attest to, the cost of employing someone significantly exceeds their hourly wage or annual salary. Below are some of the direct and indirect contingent costs of investing in employees.

It is important to keep in mind that for every $1.00 an employer invests in an employee, that employee on average must generate at least $3.15 of revenue for the employer to keep $1.00 after taxes at the top rate of 53.53%.

Direct Costs

The costs outlined below are required and form the starting point for determining the cost of each employee.

 The CRA has a handy Payroll Deductions Online Calculator you can use to see how much employer contributions will impact the true cost of an employee. This payroll calculator from Quickbook is useful for determining a high level estimate of the cost of each employee.

Benefits

While there is no getting away from mandatory CPP and EI contributions, employers will now need to carefully consider how many extra benefits they want to offer employees. While the cost of a benefits program may be high, the cost of not offering benefits and losing, or failing to attract, high quality talent to the company may be much higher. Common components of a benefits package include:

The cost of a benefits program could be 15-30% of your total annual wage bill.

Other benefits, such as offering flexible work hours, a work from home option or hybrid office /home option, may not come with any direct costs at all and help significantly with staff recruitment and retention.

Tools of the trade

Then of course there are the costs of equipping your employee with the tools they need to do their work, such as:

Time Off Work

Employees are of course entitled to time off work.  Days away are particularly important to take note of if replacement staff must be brought in to cover for the absent employee.

Leaves of Absence

In addition to annual holidays, employers must also be prepared for potential leaves of absence from the workplace and their short and long-term impact on the business.

Departing Employees

If an employee is let go from their position, or leaves on their own, there will be costs connected with their departure, including:

Administrative Costs

With more staff, comes more administrative and supervision work for you or other members of your team.  Some of the administrative costs are:

The bottom line is that employing Canadians is costly and will continue to trend upward. That is not to say that the costs are necessarily unfair or unjustified; they are a part of doing business and an aspect of doing business that has long been recognized by successive governments as an essential underpinning of our economy.

Off-Setting Costs of Employees

There are a few programs that can be accessed to help off-set some of the wage costs.

Through the Scientific Research and Experimental Development (SR&ED) tax credit, Canadian controlled private corporations can earn a refundable investment tax credit at the enhanced rate of 35% on qualified SR&ED expenditures of $3 million. Salary costs are normally the largest component of an SR&ED claim.

The Apprenticeship Tax Credit is a non-refundable investment tax credit equal to 10% of the eligible salaries and wages payable to eligible apprentices, up to a maximum of $2,000 per year, per applicant.

The Co-operative Education Tax Credit is available to employers who hire students enrolled in a co-operative education program at an Ontario university or college.

SMEs affected by COVID have until the end of 2021 to apply for a Business Credit Availability Program low interest loan to cover cash flow needs.

There are also a number of industry specific programs in areas such as tourism, indigenous tourism, rural SMEs, aerospace, food retailers, manufacturing, online stores and more. Click here to see a complete list.

We have helped, many of our clients assess and take advantage of these and other tax incentives when they invest in expanding their businesses and hire new employees.

For most businesses, wages represent the biggest expense to their business. Having a complete grasp of the cost of the investment in this critical resource will help owners with their strategic plans and annual budgeting. GGFL is here to help owners develop their business plans and put in place actions that will ensure the investment in employees pays off in the long run.

Insights

Read our recent articles

For your business and personal finances.

service-images

The Bare Facts on The New Bare Trust Reporting Requirements

The government has introduced new reporting requirements for bare trusts that are expected to have… Read more

service-images

New Reporting Requirements For Trusts

Each tax season brings the enforcement of tax changes announced in the previous year. This… Read more

service-images

CRA Imposes Penalty for Cheques

If writing a cheque is your preferred method of paying CRA, you might want to… Read more

green-chevron

Let’s Connect

Reach out today to discover the
opportunities behind your numbers

Contact Us
bordered-eclipse