Employee Compensation

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Employee Compensation
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Overall Objective

• To achieve maximum satisfaction to the employee
  at the least cost to the employer
• Compensation is important for
• morale
• enhancing efficiency
• reduces staff turnover
• attracts best employees
• helps in dealing with unions

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3 types of compensation

• Direct
• Indirect
• Deferred

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Direct Compensation

• Generally this is the amount paid in salary
• The payment of salaries reduces the taxable
  income of the employer by their marginal tax
  bracket.
• The employee's taxable income increases
• If the employer is in the 16 tax rate category,
  a 20 raise has an after tax cost of 16.8.

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• If the employer is in the 33.50 tax rate
  category, a 20 raise has an after tax cost of
  13.3.
• A 20 raise to an employee in a 45.50 tax
  bracket receives 11.1 in after tax .
• A 20 raise to an employee in a 30 tax bracket
  receives 14 in after tax .

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Indirect Compensation

• Some types of indirect compensation are taxable
  and some are not.
• Refer to Handout

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What value is there to indirect compensation?

• Economies of scale
• Sometimes the employee would purchase the item
  personally if not provided for by the employer.
• Look at Handout of alternatives

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Points to remember

• It is very important for the employer to examine
  compensation costs in after tax returns.
• Value forms of employee compensation in terms of
  salary equivalents
• Always explain alternatives to employees-very
  rarely done.

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Non-taxable indirect

• Refer to Handout
• While none are taxable to the employee, they are
  deductible to the employer except club fees.
• They create additional cash flow in 2 ways
• eliminating tax on amt of benefits recd by the
  employee
• economies of scale

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Example

• An employer pays 2,000 bonus to the employee who
  is in a 40 tax bracket. The employee needs
  additional family health insurance and disability
  ins. The employer is in the 16 tax bracket. The
  employer can purchase these plans for a 20
  reduction in cost from what the employee would
  pay.

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• The salary increase or benefits package cost to
  the employer is 2,000 - 320 (16 of 2,000) or
  1,680.
• The after-tax value to the employee is extremely
  different.
• On a bonus of 2,000 the employee pays tax of
  800 and thus pockets after tax 1,200

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• If we assume instead that the employer pays
  2,000 for the family health coverage and
  disability ins.
• Benefits recd tax free 2,000
• Discount to employer 20 500
• After tax value 2,500
• 2,000 is after tax reduction so 2,000/.802,500
  - 2,000
• A 2,500 after tax value is salary of
  4,167.(2500/.60)

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Rule

• It is worthwhile to provide employees with tax
  free benefits that can be purchased at a
  discount. Keep showing employees in pre-tax
  salary equivalents for the benefits they receive.

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Deferred Compensation

• Compensation payment that is delayed until some
  future time.
• Advantages
• May lower tax rate on the income
• If the pymts can be invested on behalf of the
  employees, investment return is on a before tax
  basis
• Saving for retirement

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Registered Plans

• E.g.. Registered pension plans, (RPP) or deferred
  profit sharing plans. (DPSP)
• Deductible to the employer
• Not taxable to the employee until amounts are
  withdrawn in the future
• There are limits to the amts available.
  Essentially 18 prior yr earned income or 21,000
  (2009) per year.

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Non-registered plans

• E.g.. Employee profit sharing plan, employee
  trusts or retirement compensation arrangements.
• Employee is allocated employer contributions and
  investment income earned on the amounts
  contributed and pays tax annually on mats.
• When amts are withdrawn, no tax.

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Stock based plans

• Stock options
• Preferential treatment for stock dividends of a
  Canadian controlled private Corp. (CCPC)
• No tax on benefit when option exercised- only
  taxed when shares are sold, therefore tax bill
  coincides with receipt of cash from sale of
  shares.

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Responsibilities as an employer

• Deduct income tax, CPP, and EI from employees
  wages remit to CRA.
• Employer holds these amts in trust.
• Remit these amts and your employer share as well.
• File T4s showing employment income for a yr on
  or before February 28 of the next yr.

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• Send in deductions by the 15th of the month
  following the month deductions made. (If Sat or
  Sun - next working day)
• Penalties and int for failure to do so by the
  time limit
• 10 of amt you should have remitted
• Can be increased to 20 if done in the same yr.

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• Failure to file T4s-
• 25 a day min penalty 100 and max 2,500

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Directors Liability

• Directors are jointly liable with the corp to pay
  the amounts due for wages. This includes any
  penalties interest.
• The director is not personally liable provided
  he/she takes positive action to ensure the corp
  makes the necessary deductions.
• Very hot area in the courts.

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What if a business ends?

• Send all remittances within 7 days of closure
• Complete T4 and T4 supplementary
• DO record of employment for all employees

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CPP

• 3 conditions Required to withhold CPP if
  employee is
• 18 yrs of age or over but not 70 years old or
  over and
• pensionable employment and
• does not receive a CPP retirement or disability
  benefit

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CPP

• Amts subject to CPP
• Salary wages
• Bonuses
• Commissions
• Tips gratuities
• taxable benefits
• stock option benefits

• Exempt from CPP
• Casual employment
• employment of a child if no remuneration paid
• employee as a census taker or election worker if
  not regular employee work lt 25 days

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How to deduct CPP

• The employee pays a premium and the employer
  matches it (1 for 1)
• You do not take into a/c any CPP paid in prior
  employment
• Max pensionable amt is declared each yr. For 2009
  42,800.
• There is a basic yearly exemption - do not deduct
  CPP if annually you pay less than this amt.
  (3,500 in 2009)

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Maximum CPP

• Earnings gt 42,800 from one employer does not
  result in CPP.
• Max employee contribution in 2009 is 2,118.60.(
  46,300 - 3,500) x 4.95
• Max employer contribution is also calculated at
  2,188.60.
• Self employed individuals pay 2 x 2,118.60
  4,237.20.

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Employment Insurance

• EI is based on insurable employment, which
  includes most employment in Canada.
• There is no age limit for deducting EI.
• Both the employee and employer paid EI premiums.
• For 2009, max EI insurable earnings is 42,300 at
  a premium rate of 1.73 for a maximum annual
  premium of 731.79.

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• Employer pays 1.4 times the employee required
  remittance. (2009- 1024.51)
• Max amts apply to each job the person has.
• Self employed people do not pay EI.
• EI rates have come down considerably. In 1996
  Emplyee paid 1,150.50and emplyer 1,601.70. 2009
  is increased over 2008 (711.03 995.44)

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Non insurable employment

• casual employment
• non-arms length employment
• where a corp employs a person who controls gt 40
  of the corps voting shares
• census taker

• Employment that is an exchange of work or
  services
• various other special circumstances

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Income Tax

• The employer is required to deduct tax from the
  pay of the employee
• Each employee fills out a TD1 form or the max amt
  of tax is withheld. (Claim code 1)
• Code 0 in the books is for non-residents
• Also now have to look up Newfoundland tax

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Amounts subject to deductions for tax

• Salary wages
• Bonuses
• Pensions
• Retiring allowances
• Death benefits

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• The amount you use to determine tax ded is the
  gross remuneration less the employees
  contribution to a RPP and also less the mat for
  union dues
• Do not reduce gross remuneration for CPP and EI
  withheld.

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CRA Online Calculator

• http//www.cra-arc.gc.ca/esrvc-srvce/tx/bsnss/pdoc
  -eng.html
• Assists in calculating CPP EI and Tax deductions

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Nfld. Health Post Secondary Education Tax
(HAPSET)

• Referred to as payroll tax
• General rate is 2 of taxable remuneration
• Taxable remuneration Remuneration less the
  first 1,000,000 pd each calendar yr.
• The 1,000,000 is split among associated companies

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• Employers with payrolls in excess of
  1,000,000will receive a tax reduction of up to
  10,000 depending on their payroll amount for
  2008.
• Regressive tax

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Workers Compensation

• All employers engaged in, about or in connection
  with an industry in the province must register
  with the WHSCC.
• Employers with at least one full time, part time
  or casual worker is required to register.
  (Includes the owner)
• All incorporated entities must register

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• Non-incorporated business is required to register
  only if a worker other than the proprietor or
  partner is hired.
• Optional personal coverage is available for
  proprietors and partnerships.

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Assessable Earning for WC

• Regular salary
• Overtime pay
• Directors fees
• Vacation pay
• Bonuses
• Tips
• Profit sharing
• Commissions

• Sick pay up to 13 consecutive wks
• Dividends
• All other taxable benefits

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How is WC calculated?

• Max amts of assessable earnings of 50,379 per
  employee for 2009. (49,295 in 2008)
• The rates for WC are determined by assessable
  earnings projections. Rates in the booklet are
  per 100 of assessable payroll.
• The classifications are done in accordance with
  industries.

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Some Rate Examples
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Some Rate Examples