Casual Labour Rules
Paying Employees From The Cash Drawer

Published January 2012  |  Revised June 13, 2024

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.

Casual labor, often referred to as day labor, temporary labor, or seasonal labor, involves employing workers on an irregular or short-term basis. This type of labor is prevalent in industries like agriculture, construction, landscaping, moving companies and hospitality. 

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.

Fair Labor Standards Act (FLSA)

The Department of Labor (DOL) administers and enforces a variety of federal labor laws, including the Fair Labor Standards Act (FLSA), which impacts casual labor. Their website explains that the FLSA "establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments." Essentially, it is a law that protects workers against unfair pay practices and facilitates better working conditions.

More >> DOL Fact Sheet 13: Employee or Independent Contractor Classification Under the Fair Labor Standards Act (FLSA)

Fact sheet 13 states, "When an employer-employee relationship exists and the employee is performing work that is covered under the FLSA, the employee must be paid not less than the federal minimum wage ($7.25 per hour) and overtime pay that is not less than one and one-half the regular rate of pay for all hours worked over 40 per week unless a relevant exemption applies."

Furthermore, the DOL's new Final Rule goes went effect on March 11, 2024 making it more difficult to classify a worker as an independent consultant.

Day labourers are covered by employment laws but as Garrison Law points out in their article Day Laborers, they "often face difficulty asserting their legal rights due to economic or immigration status, the nature of the work does not impact your coverage under U.S law."

More >> DOL on Day Laborers

Internal Revenue Service (IRS)

Generally, the IRS classifies casual labourers as either employees or independent contractors. The categorization is important as the tax implications are significant. Employers must withhold payroll taxes from casual labourers classified as employees, while independent contractors are responsible for their self-employment tax and income tax obligations.

More >> Hiring Independent Contractors

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.

State Position on Casual Labor

States have their own labor laws that may complement or be more stringent than federal regulations. I have already presented California's position.

Here are some common areas where state laws may impact casual labor:

1. Minimum Wage: Many states have their own minimum wage laws that are higher than the federal minimum wage, and employers must pay the higher of the two.

2. Employment Taxes and Unemployment Insurance: States may have additional employment tax requirements, including state income tax withholding, state disability insurance, and state unemployment insurance. Employers must comply with these state-specific requirements for their casual laborers.

3. Worker Classification: Some states have stricter criteria than the IRS for determining whether a casual laborer is an employee or an independent contractor. For example, California (already discussed) uses the "ABC test" for worker classification.

4. Workers' Compensation: States generally require employers to provide workers' compensation insurance for their employees, including casual laborers, to cover work-related injuries and illnesses.

5. Local Ordinances: Individual cities or counties may have additional labor ordinances, such as living wage requirements or specific rights for day laborers.

Key Takeaways

In summary, the handling of casual labor in the U.S. involves a combination of federal and state regulations. Employers must navigate these rules carefully to ensure compliance with tax withholding, wage and hour laws, worker classification, and other employment regulations. It is often advisable for employers to consult with legal or HR professionals to navigate these complexities effectively.

 

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 looks at the facts and their status is determined by law. Some casual labor workers would be classified as independent contractors, others as employees. Which rules and guidelines apply is dependent on the circumstances.

The DOL's 2024 Final Rule now makes it harder to classify workers as independent contractors. The 2021 Final Rule was more business friendly than the current rule so as a business owner, understand that rules around casual labor may not be the same as in the past.

If classified as an independent contractor, the employer still has obligations. 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-NEC 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 dependson 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 by submitting Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding if you would like an IRS determination on whether or not a worker is considered an employee,  .

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.

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.

Three other possible options:

1. Create a payroll clearing account. Run cash wages through it and run payroll through it. It should clear to zero.
2. Create an "ask the accountant" account and let the accountant decide at year-end how to deal with the cash wages paid to a family member.
3. 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. Of course, I wouldn't do this until I had discussed the situation with the business owner.

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.