The short answer is, never. If that’s all you were looking for you can stop reading now but if you want to dig a little deeper into the issue and learn about why it doesn’t make sense from the business and employee perspectives aside from not being legal then this is the article for you. First, let’s take a look at this from the perspective of your employee. As a business owner, it is your responsibility to know not only what is legal, but also what is in your employee’s best interest. I’ve talked to employees before who were adamant that they were being ripped off because their wage was x dollars an hour, they worked x hours but their paycheque was not for the full amount. Even after showing them their paystub and explaining how tax is withheld along with CPP and EI they still did not believe me or understand. They thought it should be their choice how much and what tax they remitted. You need to take responsibility for your employees and help them understand why taking only cash work is detrimental to them.
Who would even ask for a cash arrangement?
I’ve seen a few scenarios where employees are looking for cash, under the table, pay. First, some people just don’t want to pay tax. Fair enough, paying tax is a drag, and in Canada we pay a lot of tax. Personally, I don’t mind paying tax, I just wish the bureaucrats didn’t waste so much of our money. Second, some people are on EI, some version of social assistance or disability and they have a cap on how much they can earn before it starts getting deducted from the support payments. Third, is a scenario where some people like to stay off the grid or don’t want the government to know about their income. Sometimes this is because they owe money for child support, or they lost a lawsuit, or there is some other reason that their wages might be garnished. Or they are trying to top up their income without anyone else finding out how much money they actually earn. In all cases, it generally comes down to someone wanting to not share their wages with anyone else, whether that is the public coiffeur or an individual.
I’ll address these as a group since they all really come down to the same thing. Whether you’re trying to avoid increased alimony payments, repaying some old debt resolved through the legal system, or just trying to avoid taxes, the end ask is the same. You want some of the benefits of employment without one of the drawbacks. But what is your employee missing out on if you pay them cash and don’t declare it on a T4? Let’s start with the obvious. They aren’t paying taxes. And I don’t just mean that they aren’t contributing to the collective social safety nets (one of which they may be utilizing while asking for this favour). But they also are not paying into the taxes that directly benefit them. Like CPP and EI. When it finally comes time to hang up the skates and retire most of us expect to get some amount of CPP. What many people don’t realize though is that your CPP entitlement is calculated based on how much you’ve contributed over the course of your working life, up to the maximum. So, if you are not contributing now, that’s going to bite you in the rear later on. And EI. Again, if you don’t pay into EI, you can’t collect it.
And people change.
And what happens to your employee if they get hurt on the job while working illegally? Of course, this is a problem for you, the employer, but it is also a problem for the employee. When WSIB or WCB calls up your employer looking for payment records so they can pay your injured worker there won’t be any. So how does the employee get paid? And what if we are talking about something more serious than a few stitches? What happens to your employee if they have a major, life changing accident while working under the table? Ultimately it comes down to one option, and that option is to sue you and your business. And in the meantime, your employee has to figure out how they are going to keep paying rent and buying groceries. Things get dark fast when you try to game the system and lose.
And let’s not forget about the old RRSP contribution room. Even if your employee is not contributing to an RRSP and thinks they never will, you should know, as an entrepreneur and employer, that people change. And if they are not getting paid on a T4 then they are not increasing their RRSP contribution room and one day they may be in a position to want to save a little something whether for retirement or as a tax-deferred way to save for their first home purchase. And finally, at some point in every employed person’s life they will go looking for credit. Whether in the form of a credit card, line of credit, financing a new appliance, a car loan or a mortgage. And to get any of those you need a history of legitimate income. Although we touched on the employer a little already, there are yet more reasons for you to follow payroll rules.
When is an expense not an expense?
The number of times I’ve listened, with a greater or lesser degree of patience, while an employee man-splains to me why paying them cash is better for the business too, are too numerable to recall. I want to be clear. As a business owner myself, and as an advisor to my clients, it is fundamentally important that you protect yourself from avoidable liabilities. Whether those liabilities come in the form of potential lawsuits, financial audits and fines or even creating expectations for your employees that are not sustainable. And paying someone ‘under the table’ opens up a whole bunch of un-advantageous potential liabilities for you.
First, if you don’t put an expense on the books then it is not a business expense. Seems obvious right. But I’ve had people ask me how to declare the expense without the employee declaring the income. The answer is: you don’t. That’s what ‘under the table’ means. Losing one of your major legitimate expenses is a great way for you to end up paying the extra tax your employee is trying to avoid. Where does the cash come from if you can’t make it a legitimate expense? Well, if you get enough cash from customers, which is less and less likely these days, then you at least have that as a starting point. But as soon as you declare the cash sales the money is in your business and now how do you get it out to pay the employee cash? You can pay it to yourself I guess, and you pay the tax. Or you can dividend it to yourself, and again pay the tax. Or you could make up some other expense and hope you never get caught. Maybe you will and maybe you won’t. But if you do the penalties are steep and you’ll be plagued by expensive, time consuming audits and flags on your accounts for a long, long time. And if your bookkeeper or accountant finds out you may risk losing their services too as most of us don’t want to get embroiled in fraud. You could take the cash from customers, void the bill and use that cash to pay employees right? Then it’s not going into the business in the first place. Well, physically, yes that’s possible. But don’t forget that with technology comes audit trails. This isn’t 1980 where things are hand-written and you can just crumple up a bill and the history of it is gone. Presumably you’re a good operator and your kitchen staff knows that every item that leaves the kitchen needs to have a chit. If you do decide to void bills and keep cash you are putting yourself in an even worse potential position. Because now you’re not declaring the sales tax, or the revenue or the payroll tax. In fact, it was that very practice that gave restaurants a bad name in the financial lending world for a long time. Restaurants and similar cash heavy business used to be very easy to manipulate and scam your way out of taxes without much, or any, paper trail. But things are different now and it is not worth the risk of putting yours and all your other employees’ livelihoods in jeopardy just so one person can run a scam through you.
To recap, for the employee they don’t get the CPP or EI benefits, no worker’s comp and no record of income to help them get things like credit cards, lines of credit, car loans or mortgages. And no increase to their RRSP contribution room. For the employer you run the risk of defrauding the government and getting audits, fines and long time flags on your accounts, you risk potentially paying the tax yourself, you do not get the business expense of having an employee, and if that employee gets injured on the job or decides to try and claim EI when they leave or lose the job, you are up a creek and on route to an audit and fines. There are so many ways to make money doing things above board that the risks of paying cash ‘under the table’ definitely outweigh the benefits, which you’ll note, do not exist for the employer at all.