Casual Labour Rules
Paying Employees From The Cash Drawer

by L. Kenway BComm CPB Retired

Determining how to record casual labour seems to be a grey area for a lot of small business owners and is often challenging. I layout the IRS and the CRA's positions on casual labor. I've also consolidated the forum postings on this topic.

Can you pay employees as casual labour for only a few days work without payroll deductions?

In the U.S.

In the U.S., EDD California provided an excellent explanation on the status of casual or day laborers. As this article is from California, you will need to check your state for casual labour laws. Here is EDD's explanation:

"“Casual labor” and “day labor” are common terms used to describe workers performing a variety of services, usually on a temporary or part-time basis. Many businesses hire these types of workers and mistakenly believe that they are not employees simply because of their limited length of service or part-time hours. Even though these workers may be hired for only an hour, day, or week, they are typically employees.  

Some examples of the types of workers referred to as casual laborers include:

• Part-time help
• Day laborers
• Students
• Outside laborers
• Temporary help
• Substitutes
• Workers in training
• Employees hired on a trial basis
• Workers paid less than $600 a year"

The link above also deals with the criteria for excluding casual labour from employment. As in Canada, one of the criteria is the service cannot be in the course of your trade or business.

For more information on IRS's position on casual labor, see Publication 15 (Circular E) Employer's Tax Guide. Go the index of the publication and look up part-time workers.

 

In Canada

In Canada, casual labour no longer applies as a category when doing payroll except if it relates to "a purpose OTHER than your usual trade or business". If this definition does NOT apply, EI and CPP must be withheld.

You can find more information in CRA's publication Employeer's Guide - Payroll Deductions and Remittances. Search the document for the term "casual employment".

Meaning of Casual Labor

In The U.S.

Casual labor, also referred to as day labor, is work that is non-regular and temporary. Casual laborers typically work in sectors such as construction, landscaping, or moving companies. Job duration can range from a few hours to a few weeks. 

Workers doing casual labor are not necessarily employees in the traditional sense; instead, they're often classified as independent contractors. An independent contractor has more self-governance and flexibility, but they are also responsible for withholding their own taxes, as employers do not withhold these taxes from their paychecks.

"Casual labor" may not be specifically referenced by the IRS on their website because it often falls under the broader categories of "independent contractor" or "self-employed" work. Their website does address part time or seasonal help. The IRS tends to use these terms more often because they're more encompassing and legally defined, whereas "casual labor" is a more informal term.

The IRS does not specify particular regulations or "rules" for casual labor in terms of hours worked or amount earned. When addressing tax responsibilities for people working in a non-traditional or temporary capacity, the IRS would typically consider these workers to be independent contractors. Therefore, the rules and guidelines provided for independent contractors or self-employed individuals would apply.

However, anyone who makes more than $600 per year from a particular employer will need to report that income. The employer is required to issue a 1099 form if payments to an individual exceed $600 in a calendar year. If they paid less than $600, the casual laborer is still required to report the income on their tax return.

Casual labor tax rules are different for corporate entities. Corporations usually have to file a 1099 regardless of how much they pay an independent contractor.

Regarding additional information, it's essential to be aware that while casual labor laws provide flexibility, they also open up potential issues. Casual laborers don't get benefits (like health insurance and retirement contributions) that traditional employees often receive. The risk of job instability is also higher, which may not suit everyone.

Moreover, classifying workers incorrectly as casual laborers or independent contractors instead of employees can lead to significant legal and financial consequences. If the IRS determines that a worker is misclassified, the employer may be held liable for employment taxes for that worker, plus a penalty.

However, it's important to remember that the classification of a worker (whether as an employee, independent contractor, or casual laborer) can be complex and depend on the circumstances of the work being performed. Therefore, if there is any uncertainty, it's advisable to consult with a tax professional or contact the IRS directly for clarification.

In Canada

In Canada, casual labor typically refers to work that is not regular, systematized, or part of the usual business of the employer. This often includes tasks that are occasional, incidental or irregular.

The Canada Revenue Agency (CRA) provides guidelines on employment status. According to the CRA, the status of a worker as an employee or a self-employed individual (independent contractor) is not based solely on the contract agreement but takes into account a variety of factors.

These factors include how much control the employer has over the worker's activities, whether the worker provides their tools and equipment, whether the worker can subcontract the work or hire assistants, the financial risk taken by the worker, the worker's opportunity for profit, and any other relevant factors such as written contracts.

Is the employment casual?

While casual labor may sometimes be handled as contract work, it ultimately depends on these details. If workers are considered employees by the CRA's criteria, the employer has obligations such as making Canada Pension Plan (CPP) contributions, paying Employment Insurance (EI) premiums, and withholding taxes on the employee's income.

On the other hand, if the workers are considered independent contractors, they would be responsible for paying their own income taxes, CPP contributions and they may not be covered by EI.

It’s always a good idea to get a ruling from the CRA to confirm the worker’s employment status and accurately understand the related tax implications. You can request a ruling via either the CRA’s website or by phone.

What does CRA look at when determining if casual labor is pensionable or not?

The CRA considers two main conditions when determining if casual labour is pensionable under the Canada Pension Plan (CPP):

1. The Duration of the Employment: According to CRA, only employment of a casual nature that is not on a regular or systematic basis is excluded from pensionable employment. If the employment is longer term or has some degree of regularity, it can be considered pensionable.

2. Connection with Employer's Business: Even if the work is not conducted on a regular or systematic basis, it's still pensionable if it can be considered as being part of the employer’s normal business.

However, as previously mentioned, it is always suggested to seek a ruling from the CRA to confirm a worker's CPP eligibility as numerous factors can play a role in the determination.

Consult with a tax professional or legal expert to get more specific advice based on your unique situation.

From an auditor's point of view

A roofer in Saskatchewan asks about recording the payment to temporary workers in his roofing business.

Non-arm's length casual labour and income splitting with family members

If this were me, I'd go find the day the cash wages were paid, then look for the bank deposit around that date that was shorted. In QuickBooks, I'd show the correct bank deposit (i.e. increase it by the amount of the cash wages) and show the cash wages taken at the bottom of the deposit screen. The net deposit should still match the bank statement deposit, so it shouldn't affect your bank reconciliation.

As explained earlier, casual wages require payroll deductions IF they are related to your business trade. Scott Taylor has a great article on the rules for hiring relatives and of course paying wages in cash still requires paperwork.

While income splitting with family members is acceptable, if the criteria isn't met (see "rules" link above), I'd likely book these wages as an owner's draw (sole proprietorship) / shareholder loan (incorporated) even though it means losing a tax deduction. You are still teaching your kids about working for their money.

You could create the Cash Account as a current asset if you want. Nothing wrong with that. Just remember you will have to "balance" the cash account at the end of the year so it's really just delaying your problem.

A seasonal worker, asks why their employer will not be taking any deductions off their pay cheque. 

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Bookkeeping Essentials › Casual Labour Rules in Canada and the U.S.