YES! Payroll is expensive! Listen to the bookkeeper we all need!
"New business owners are always shocked with how much an employee really costs"
June 12, 2019 by Robert Koci
This could rank as my letter of the year. I received an email from an Ontario contractor with the following message cut and pasted within it. ”I thought you might be interested to read this,” he says. It is a reply from his bookkeeper to his email exclaiming “payroll is expensive!” He had just hired his first employee and she sent him the bookkeeping for his monthly payroll. Her response to his surprise is the perfect summary of the financial implications of hiring employees vs subtrades. It’s also the story of someone taking client care to a higher level. I think she the bookkeeper we all want.
Yes, payroll is expensive – new business owners are always shocked with how much it really costs.
The part that is most misunderstood are the deductions from the employee’s pay – many employer’s don’t realize that they have to pay these deductions, not the employee.
For example, you paid David (not his real name) $26/hr for 71.33 hours on May 23 plus vacation pay of 4 percent for a total gross amount of $1,997.48 – you paid the net amount of $1,547.55 directly to David and the rest goes to the government – so the cost to you is the total gross amount of $1,997.48, not just the net amount of $1,547.55
Not only do you have to remit the employee’s deductions for income tax, EI, and CPP to the government but you also have to remit an employer portion for EI and CPP. The employer has to also pay an equivalent amount of CPP and 1.4 times the amount of EI.
For example, David’s EI was $32.36 on May 23 – you also have to pay to the government an additional amount of $45.30 ($32.36 x 1.4), David’s CPP was $95.01 on May 23 – you also have to pay to the government an additional amount of $95.01 ($95.01 x 1).
I see that your WSIB rate is 4.33 which means that for the gross pay of $1,997.48 on May 23 the WSIB owing just on that one pay is $86.49 which is paid directly to WSIB.
You can see how these amounts can quickly add up – you are also collecting and remitting the deductions on your own pay.
All of these costs will appear on your profit and loss statement under Labour On-Site – monitor the cost of labour in relation to your sales volume and the subcontractors expense – the costs of labour are worthwhile if the sales volume is increasing at a rate sufficient enough to cover the cost of labour and provide for an additional profit – they are also worthwhile if they are reducing the cost of hiring subcontractors.
For example, your sales income for Apr. was $18,171.68 – for May it was $47,896.53 – an increase of $29,724.85, your payroll cost for May was $7,675.62 – if hiring one employee enabled you to earn an additional income of $29,724.85 at a cost of only $7,675.62 then I would say it is worthwhile.
Personally I believe that hiring self-employed contractors is less costly than hiring employees – you avoid the payroll taxes, you can claim the HST that they charge as a credit, you don’t have to pay overtime rates, vacation pay or holiday pay – because they are self-employed and competing for jobs the opportunity to obtain better pricing is available – employee’s are paid a standard rate per hour regardless of their actual performance whereas a self-employed contractor charges a specific amount for the job that is to be performed. The benefit to having an employee is that they are under your control and readily available.