Employees and the Cost of Owning a Small Business
Kody Wilson, CPA, CA, CBV
Partner, Tax & Advisory Services
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.
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%.
The costs outlined below are required and form the starting point for determining the cost of each employee.
- Canada Pension Plan:
- Employers match 100% of employees’ contributions. Recent changes to the program will result in increasing costs for employers.
- In 2021, a salary of $61,600 costs an employer $3,166.45 at a contribution rate of 5.45%
- In 2022, the contribution rate will increase to 5.70%
- In 2023, the contribution rate will increase to 5.95%
- Employment Insurance:
- Employers pay 140% of the employees’ contributions
- A salary of $56,300 costs an employee $889.54; the cost to the employer is $1,245.36
- Ontario Health Tax up to 1.95% of payroll over $1,000,000 (after 2019 if the full exemption of $1,000,000 is available)
- Worker Compensation Cost:
- Average rate in Ontario is $1.65 per $100 of payroll
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.
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:
- Health insurance (physiotherapy, prescriptions etc.)
- Vision care
- Dental care
- Life insurance
- Pension / RRSP contributions
- Short and long-term disability
- Fitness memberships
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:
- IT hardware and licencing
- Desk and space in an office
- Home office equipment / furnishings
- On-boarding and on-going training
- Coaching and mentoring
- Professional association fees that are often absorbed by the employer
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.
- Ontario allows for a minimum of three weeks’ vacation for workers with five years or more service with an employer and 2 weeks otherwise.
- Employers pay 10 stat holidays to their employees:
- This equals 4.23% of the annual standard of 260 working days
- Statutory holidays are subject to all the related payroll taxes mentioned above
- Free to employees – 11 extra paid non-work days
- Employees who work on statutory holidays are entitled to ‘public holiday pay’.
- Sick days
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.
- Health and maternity/paternity leaves:
- Labour laws require holding these positions for a specific period of time, meaning that the employer must hire and train temporary staff replacements.
- The employee has no responsibility to advise the employer if they are returning, and the employer cannot ask.
If an employee is let go from their position, or leaves on their own, there will be costs connected with their departure, including:
- Severance cost:
- There is no mandatory retirement age
- Long-term employee severance can cost over a year’s salary
- Short-term layoff/firing of an underperforming employee can cost several weeks’ to a month’s salary
With more staff, comes more administrative and supervision work for you or other members of your team. Some of the administrative costs are:
- Liability insurance for claims against the employee’s work
- Head hunting fees are 20-30% of a prospective employee’s salary; it is not refundable if the employee fails after their initial probationary period.
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.