🧾 Why Some Nail Salon Owners Only Report HALF of Income on T4 and Pay the Rest Another Way (T4A or e-Transfer)

If you’re a nail salon owner or a nail tech, you might have heard about how some owners report only part of a worker's income. This is a common — and complicated — issue in many nail salons across Canada. Some technicians get part of their income through payroll (T4) and the rest through commission, tips, or even cash. But is it legal? Safe? Or just misunderstood?

This can cause confusion, but it’s important to understand why it happens and what the CRA expects when it comes to payroll taxes and proper income reporting.

Here’s a breakdown of why some salon owners choose to pay their workers partially via T4 and partially via T4A or other methods like e-transfer.

✅ 1. To Save Money on Payroll Taxes

Paying full income on a T4 means the owner must cover additional costs like:

• Employer CPP (Canada Pension Plan)

• EI (Employment Insurance)

• WCB (Workplace Compensation)

• Vacation pay

These extras can cost 15%–25% more on top of the actual wages. To save on these payroll taxes, some owners report only a portion of the income officially on the T4, paying the rest through other methods like e-transfers or tips.

💵 Example: Nail Tech Paid $3,000/Month (on Payroll)

📌 If Paid Fully on T4:

Employee’s Gross Pay:
$3,000/month

Owner’s Additional Costs:

• ✅ Employer CPP (5.95%): $178.50

• ✅ EI (1.66% employer portion): $49.80

• ✅ Vacation Pay (4% minimum in BC): $120.00

• ✅ WCB (let’s assume 2%): $60.00

💰 Total Employer Costs:
$3,000 (wages)

• $178.50 (CPP)

• $49.80 (EI)

• $120.00 (vacation)

• $60.00 (WCB)
  = $3,408.30/month

📊 Extra cost to owner: $408.30/month
➡️ That’s 13.6% extra (can range from 15%–25% depending on benefits/WCB rate)

📌 If Owner Only Reports $1,500 on T4 + $1,500 via e-transfer (under table):

• T4 costs drop (only based on $1,500 income)

• Owner might avoid ~$200/month in payroll taxes

• ⚠️ But this is non-compliant if the worker is truly an employee

🚨 CRA Red Flag:

Mixing payment methods to reduce tax is risky. If audited, the owner could face:

• Penalties

• Interest

• Backdated payroll taxes

⚠️ 2. They Think Tips Don’t Have to Be Reported

It’s a common misconception that tips given directly by clients — even if via e-transfer — don’t need to be reported. However, this is wrong.

If the salon controls how tips are distributed (for example, collecting tips in a communal pool or deciding the split), these tips must be included as part of the worker’s payroll on the T4.

❌ 3. They Issue T4A for Part of the Income

Some owners try to classify their workers as independent contractors and issue a T4A instead of a T4. However, CRA has strict rules: If the worker is under the salon's control (using salon tools, working a set schedule), they are considered an employee and should receive a T4 — not both a T4 and T4A.

❗ So What’s Legal? What Does CRA Expect?

Here’s how to stay CRA-compliant:

✅ CRA-Compliant Way:

• If the nail tech is an employee (i.e., set schedule, uses salon’s tools, follows salon rules), then:

  • 💰 All earnings (including commissions, tips, and bonuses) must be reported on the T4.

  • There is no need for T4A.

• If the nail tech is a true independent contractor (i.e., rents a chair, sets own prices, runs their own business), then:

  • 💰 The owner may issue T4A or nothing, depending on the arrangement.

  • The independent contractor files their own taxes.

🚫 IMPORTANT: Issuing both T4 and T4A to the same person for the same income is often flagged by CRA as tax avoidance.

📅 What Happens If Part of the Income is Paid Later (e.g., Tips Paid at Year End)?

• If the tip or commission is earned during the year, it must be reported in that year’s T4.

• Even if tips are paid by e-transfer or cash, they still need to be included in payroll, unless it was a direct, non-controlled tip.

• Failure to report properly can result in CRA penalties.

💸 Why do they agree to split income?

Usually, both the owner and the nail tech have their own reasons:

👩‍💼 For the Owner:

• Save on payroll taxes:
  When paying through payroll (T4), the owner must pay:

  • CPP (Canada Pension Plan)

  • EI (Employment Insurance)

  • WCB (WorkSafeBC or provincial insurance)

  • Vacation pay
    👉 These can add 15%–25% extra cost. To save money, they only report part of the income officially.

• Less paperwork:
  Fewer employees = less admin and less CRA attention.

💅 For the Nail Tech:

• Take home more money right away (especially if cash or e-transfer)

• Avoid taxes for now (not ideal but common)

• Might be okay with it if they think:

  • “I'll report it myself later”

  • “I don’t want more taxes deducted”

But — this agreement comes with serious risk for both sides.

🔍 Where does the “other half” of income go?

Let’s say the nail tech earns $3,000/month, but only $1,500 is on payroll. Where’s the rest?

It usually goes in one of these 3 ways:

💵 1. Cash

• No digital record

• Usually not reported unless the tech declares it personally

• Risky for both — CRA calls this "under-the-table"

💳 2. E-transfer

• Shows up in the tech’s bank account

• If CRA audits the tech, they’ll see the extra income

• Owners might call it a “contractor payment” or “tip” — but if the person is an employee, CRA doesn’t accept this excuse

🧾 3. T4A Form

• Owner issues a T4A at year-end to report tips or “contractor pay”

• But CRA doesn’t like split classification
  👉 If the tech is an employee, all income (wage + tips + commission) should be on T4

❗ Is this allowed?

Usually NO — if the person is an employee, CRA says:

“You cannot split income between T4 and T4A. All income must go on T4.”

Only true independent contractors (e.g., chair renters who run their own business) should get T4A or invoice directly.

🎯 What CRA Actually Wants

CRA wants a clear distinction:

If the worker is a...Pay type should be...Regular employee100% T4 (wages + tips + commissions)Independent contractorT4A or invoice, no T4

No gray areas. No mixing.

✅ What Salon Owners & Techs Should Do

🧾 Salon Owners:

• Decide: is your worker an employee or contractor?

• Don’t mix payment types unless the role is legally split and documented

• If they’re employees, put all income on T4

👩‍🎨 Nail Techs:

• Ask questions

• Learn how income impacts your future (loans, CPP, immigration)

• Talk to a tax professional if you’re unsure

✅ Better solution?

If you want to do it right and still save taxes:

• Use a proper contractor agreement if the tech is renting space and independent

• Or keep everything on T4, including tips and commissions, and offer bonuses instead of under-the-table payments

✅ Summary: What To Do

Scenario CRA Requirement Form Used Employee earns commission & tips Report full income on T4 T4 E-transfer tips controlled by owner Include in T4 T4 Nail tech rents chair, is independent Optional T4A T4A or Invoice

If you're unsure about how to classify your workers or need guidance on handling your own payroll and tax reporting, it’s essential to seek help from a tax professional.

🔍 Why Would a Salon Owner Pay the Same Person Both T4 and T4A?

There are three main reasons why a salon owner might report both T4 and T4A for the same person. Understanding these can help you avoid costly mistakes and stay compliant with the CRA.

✅ 1. Misclassification or Mixing Roles (Semi-Intentional)

A worker might be employed part-time with a base hourly wage on the T4 but also be paid as a contractor for extra services or commissions (such as freelance work or after-hours services), which is reported on a T4A.

📌 Example:

• Sophie works 3 days a week at the salon and is on the payroll — she receives a T4.

• On weekends, she rents a chair and keeps 100% of her client revenue — the salon issues a T4A for that income.

⚠️ 2. Tax Avoidance or Lack of Knowledge (Not Compliant)

Some owners try to reduce payroll taxes by reporting only part of the income on the T4 (official payroll), then pay the rest “as contractor” via e-transfers, cash, or cheques. The T4A is issued for tips or commissions.

🚨 This is NOT legal. If the worker is an employee (under the salon’s control, uses salon tools, and works salon hours), they must be fully on T4, not mixed.

❌ 3. Mistaken Practice (Outdated or Misunderstood)

Some owners mistakenly believe that it’s okay to split the income into:

• T4 = Salary

• T4A = Commission or Tips

👉 But CRA says: If the worker is an employee, all earnings (salary + commission + tips) must go on the T4. T4A is for independent contractors only.

🎯 What CRA Wants

• One worker = one classification:

  • Employee = T4 only

  • Contractor = T4A only

  • Mixing both = big red flag unless there is a truly separate business relationship.

✅ Proper Solution: How to Handle T4 and T4A Correctly

If someone is working under your control, with a set schedule, using your tools, and following your rules — they are an employee, and all tips, commissions, and earnings through you must go on the T4.

If they are renting a chair and managing their own clients independently, that’s when a T4A may apply.

If you want additional support, I can help create:

• A guide for nail techs to know their rights.

• A guide for salon owners to ensure they do things properly.

• Templates for T4 or T4A tracking to make everything easier.

Let me know how I can assist you with your tax compliance needs!

💅 Why Nail Techs Should Want FULL Income on Payroll (T4)

1. ✅ Qualifies them for important benefits

   • Mortgages, car loans, immigration, maternity benefits, pensions, etc.

2. ✅ Peace of mind & CRA compliance

   • Easier to file taxes

   • No risk of audits

   • Proof of income if needed

3. ✅ Legal Protection & Workplace Rights

   • Access to WCB, ROE, stat holiday pay, and vacation pay

💬 But Why Do Techs Still Go Along With It?

That situation happens in many nail salons (and other service-based businesses), and it’s often due to a mix of tax avoidance and a lack of proper education about Canadian payroll and tax laws. Here’s why many techs don’t push back:

📚 1. Lack of Financial Literacy

Most nail techs never learn how Canadian tax and payroll systems work. So when they’re offered cash or a split income, they don’t understand the long-term risks — only the short-term benefit.

🤝 2. They Trust the Owner

In tight-knit cultural communities, techs often:

• Don’t question the owner

• Think “this is just how it’s done”

• Follow along without checking their rights

🌐 3. Language Barriers

Many nail techs are newcomers to Canada and:

• Don’t speak fluent English

• Can’t read CRA documents easily

• Have no one to explain the system clearly

This creates a huge knowledge gap.

💸 4. Short-Term Thinking

Getting more money now feels good — but:

• 📉 Lowers reported income (bad for immigration, mortgage, car loans)

• ❌ Reduces CPP, EI, and pension benefits

• ⚠️ Exposes them to audits and CRA fines

👀 5. Salon Owners Want to Save on Costs

Owners often:

• Avoid paying payroll taxes (CPP, EI, Workers' Comp)

• Think they’re helping the tech by giving more “cash in hand”

• Don't realize how risky this is if CRA audits

💣 One audit can result in years of back taxes, interest, penalties, and even legal action.

📢 Final Thought: More Money Now ≠ More Security Later

The split-payment system may seem helpful today — but it’s a ticking tax time bomb. CRA is watching, and ignorance won’t protect you from audits.

Whether you’re a salon owner or a nail tech, understanding your role in this system is the first step to protecting your income — and your future.

🧾 Need help sorting it out for your salon or staff?
We can guide you on proper payroll setup, contractor agreements, and CRA compliance — in English or Vietnamese.

📩 Contact us today — because doing it right is always better than dealing with the CRA later.