Ten per cent cash work sounds like a nice little boost – until you do the math

Rob says that he is “struggling really hard to find anything ethically wrong” with his contractor friend’s “Ten Per Cent Cash Work Solution” to skyrocketing workers’ comp, harmonized taxes, College of This and That, etc. Ethics versus breaking the law not always being on the same page.

But this ten per cent thing, while it sounds great, isn’t anywhere near as lucrative as Rob’s friend makes out. Rob makes it sound as if a contractor can feed his family using that formula, while the table is going to be bare at Mr. Contractor’s house if he doesn’t take the envelope. Well, working the numbers, it doesn’t look like that’s true – at the 10 per cent cash work level.

Let’s look at workers’ comp first. Workers’ comp tops out at a maximum insurable amount, so 10 per cent cash isn’t going to help anyone there.

Let’s look at sales taxes. HST can be saved on the 10 per cent cash work you do, but that’s not going to save YOU 1.3 per cent of your total gross in Ontario, for example. At best, you can split much of that HST savings with your customer, who will want a discount of about 30 per cent or more. So you might pocket an extra 1.0 per cent of your total annual gross, as far as avoiding the HST, by doing 10 per cent cash work cash work.

Saved income tax on that 10 per cent cash is going to run at a marginal tax rate of about .28 per cent, for an average earning contractor. But what would your income have been on that work, if you’d declared it? About 10 per cent of the total cash job price? Which is only 10 per cent of ALL your work. So you will save 0.28 per cent of your total gross there. Add that to your 1.0 per cent HST savings on your total gross and you pocket 1.28 per cent of your total gross, under Rob’s buddy’s 10 per cent cash plan.

The median gross done by our contractor readers last year was $600,000. Rob’s friend’s 10 per cent cash work plan would return him, in cash, 1.28 per cent of that $600,000 – or $7,680. Why? Because most of the savings will go into his cash customer’s pocket.

Which is why cash work is always a slippery slope. Cash work is a drug, not part of a sound business plan.