You own and operate a business and you have family you can hire. Should you or shouldn’t you? This is a loaded question just about every small business owner faces at sometime.
First, from a financial perspective, this can work quite well. Hiring family keeps the money in the family, so to speak, and of course is a legitimate expense against revenue therefore lowering business tax liability, especially in the case of a small corporation. In addition, there is income splitting when a husband and wife both are working for the business.
This may reduce the overall personal tax burden to the family. As well, the spouse is now paying into CPP and creating RRSP contribution room that may aid in better retirement planning. And of course, if it is a child of the owner who is hired, this provides necessary income for their benefit, not to mention the skills building.
How much to pay? The Canada Revenue Agency (CRA) demands that the job performed is one that would have to be performed in the first place, regardless of who is hired, and that the pay must be at fair market value.
Besides the apparent job tasks needed to run your business, some other legitimate tasks that CRA will accept include office and company vehicle cleaning, phone answering and clerical duties, computer data entry and internet research, and business errands.
As with all things CRA, ensure a clear paper trail.
Have a signed offer of employment with job description including remuneration especially if commissions or bonuses are paid, record hours worked, and use business cheques for payment – do not use cash. Remit the appropriate source deductions.
And wages must be paid on a timely basis. CRA frowns upon an annual pay period.
Speaking of wages, at least minimum wage must be paid – sometimes an embarrassing mistake that CRA catches and, by the way, will fine accordingly.
From a family dynamics perspective, the issue of how much to pay creates an interesting conundrum.
Pay too much and you might actually imprison the family member because it will cost them too much to change employers. As well, one day you may decide not to overpay. Either way you will suffer the family consequences.
At the same time, if you under pay a family member, resentment due to exploitation may develop and again you will suffer the family consequences.
To state the obvious, regardless of CRA rules, pay a family member a fair market wage rate. And if desirable, offer personal performance and business profitability incentives.
This will provide a level playing field for all employees, family or otherwise, and reward only those who deserve it based on effort and outcomes.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca