You’ve been selected for a payroll audit. It’s not exactly pleasant news, and few business owners want to hear it. Yet, provided you’re doing everything on the up and up, an audit shouldn’t have you too strung out. Yes, it’s additional work, but you’re on the right side of the law.
For many Canadian business owners, however, audits often leave them with a few payroll audit fines for things they didn’t even know they weren’t supposed to be doing. Here are some of the common payroll audit fines and how you can avoid them.
The CRA is very concerned about the underground economy in Canada, and one of their goals is to eliminate it. It’s easy to see why: Workers paid “under the table” rarely pay income tax on their wages. For businesses, there’s incentive to pay people above board, such as writing off the expense, but there’s equal incentive to pay people and keep it off the books.
If you’ve been paying individual workers under the table for their services, you could end up paying costly fines if your payroll is audited. Instead, keep everything above board. There’s one major advantage for you in doing this: You can write off these payments against your taxes.
Improper Reporting of Securities and Stock Options
Employees aren’t taxed for securities or stock options until they exercise or dispose of the option. You, as the employer, however, need to be keeping track of employee stock options and reporting on them. If you don’t, you could end up paying fines for improperly reporting this information.
You’ve probably heard about businesses firing people, only to rehire them, often at a lower wage. Another common practice is to fire someone, then hire them to perform similar or the same services as a contractor.
The CRA frowns on this. The act of firing and rehiring may be enough to initiate an audit in the first place. If the CRA finds the rehired worker is conducting similar work in the same or a similar workspace, they’re likely to fine you.
Avoid this by ensuring you use proper contracts and have the worker agree to all of the clauses laid out therein.
Some employers in Canada offer their employees additional “perks,” such as reimbursement for living expenses. The CRA sometimes finds these perks taxable, pensionable, and insurable. If that’s the case, you might be accused of hidden remuneration.
Avoid fines on this front simply by reporting your employees’ personal expenses, if you offer this perk.
Failure to Maintain Records
This is a particular danger for small business owners: The CRA may cite you for failure to provide or maintain adequate records. You may be struggling to keep the books yourself, or you may have passed the duty to someone else.
While inadequate bookkeeping is unlikely to sink your business, it could result in a request for compliance from the CRA and a fine of up to $1,000.
The biggest problem is usually business owners who believe they have proper bookkeeping, but may not have kept records in accordance with the Income Tax Act. If the bookkeeping hasn’t been up to snuff, the CRA may find additional problems during an audit, resulting in more payroll audit fines for the business.
The solution? Hire someone to keep the books properly! Many services are much more affordable then you think they are. Getting expert help in simply keeping proper records can help you avoid many of the payroll audit fines you’re likely to encounter.
Partnering with a payroll services provider can help you avoid many of the payroll audit fines in Canada. They know the ins and outs of the law and the best practices to keep you on the up and up.