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Employee Compensation

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					Employee Compensation
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
3 types of compensation

Direct
Indirect
Deferred
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 18.1% tax rate
 category, a 20% raise has an after tax
 cost of 16.38%.
If the employer is in the 43.1% tax rate
 category, a 20% raise has an after tax
 cost of 11.38%.
A 20% raise to an employee in a 48.6%
 tax bracket receives 9.72% in after tax $.
A 20% raise to an employee in a 29.24%
 tax bracket receives 14.15% in after tax
 $.
Indirect Compensation

Some types of indirect compensation are
 taxable and some are not.
Refer to Handout
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
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.
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 rec’d by
   the employee
  economies of scale
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 18.1% tax bracket. The
 employer can purchase these plans for a
 20% reduction in cost from what the
 employee would pay.
The salary increase or benefits package
 cost to the employer is $2,000 - 362
 (18.1% of 2,000) or $1,638.
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
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/.80=2,500
   - 2,000
  A $2,500 after tax value is = salary of $4,167.
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.
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
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
 $13,500 per year.
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.
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.
Responsibilities as an
employer

Deduct income tax, CPP, and EI from
 employee’s wages & remit to CCRA
 Employer holds these amts in trust.
Remit these amts and your employer
 share as well.
File T4’s showing employment income for
 a yr on or before February 28 of the next
 yr.
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.
Failure to file T4’s-
  $25 a day min penalty $100 and max $2,500
Director’s 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.
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
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
CPP

Amts subject to           Exempt from CPP
 CPP                         Casual employment
  Salary & wages            employment of a child
  Bonuses                    if no remuneration
  Commissions                paid
  Tips & gratuities         employee as a census
                              taker or election
  taxable benefits
                              worker if not regular
  stock option benefits      employee & work <
                              25 days
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
 2003 – $39,900.
There is a basic yearly exemption - do not
 deduct CPP if annually you pay less than this
 amt. ($3,500 in 2003)
Maximum CPP

Earnings > $39,900 from one employer
 does not result in CPP.
Max employee contribution in 2002 is
 $1,801.80.( $39,900 - $3,500) x 4.95%
Max employer contribution is also
 calculated at $1,801.80.
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 2003, max EI insurable earnings is $39,000
 at a premium rate of 2.1% for a maximum
 annual premium of $819.
Employer pays 1.4 times the employee
 required remittance.
Max amts apply to each job the person
 has.
Non insurable employment

casual employment     Employment that is
non-arms length        an exchange of work
 employment             or services
where a corp employs various other special
 a person who controls  circumstances
 > 40% of the corp’s
 voting shares
census taker
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
Amounts subject to
deductions for tax

Salary & wages
Bonuses
Pensions
Retiring allowances
Death benefits
The amount you use to determine tax ded
 is the gross remuneration less the
 employee’s contribution to a RPP and also
 less the mat for union dues
Do not reduce gross remuneration for CPP
 and EI withheld.
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 $500,000 pd each calendar
 yr.
The $500,000 is split among associated
 cos
Workers Compensation

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

Regular salary   Sick pay up to 13
Overtime pay      consecutive wks
Directors fees   Dividends
Vacation pay     All other taxable
Bonuses           benefits
Tips
Profit sharing
Commissions
How is WC calculated?

Max amts of assessable earnings of about
 $45,500 per employee.
The rates for WC are determined by
 assessable earnings projections. The rates
 in the booklet are per $100 of assessable
 payroll.
The classifications are done in accordance
 with industries.
For example, golf course maintenance is
 Rate Code 9651 at a rate of $2.26 per
 $100 of assessable payroll.
Hairdressing salons pay $.83 (Rate Code
 9712)
Rate class 211 Veterinarians & kennels
 are only .54.

				
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posted:8/18/2011
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