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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