Payroll management is time-consuming, complicated, and stressful, but it’s a critical part of running a business and must be completed in compliance with Canada’s payroll rules and guidelines. Mistakes may cause legal/financial trouble with employees and/or the CRA. Understanding what is involved and how payroll works ensures you safeguard your employees and company. The following is a payroll 101 guide; everything you need to know as a business owner.
What is Payroll?
Payroll is the procedure for providing company employees with wages/salary. It involves tracking hours worked, calculating pay (wages/salary, taxable benefits, allowances, etc.), withholding, remitting, and reporting source deductions (CPP, EI, income tax, RRSPs, etc.), and distributing payment (direct deposit, cheque, cash, etc.). A good payroll system gets the right amount to each person at the right time. Though it may be completed by hand, payroll is typically accomplished through payroll software or outsourced to a third party (accountant, bookkeeper, payroll specialist).
How to Set Up and Process Payroll
When setting up and completing payroll for your business, you need to:
- Register with the Canadian Revenue Agency (CRA) for a payroll account and business number.
- Register for Worker’s Compensation and Employer Health Tax.
- Set up a business bank account.
- Select CRA-compliant payroll software (TurboTax Business Incorporated, QuickBooks Online, T2Express, Tax Chopper Pro T2, etc.) and/or hire a payroll specialist (bookkeeper, accountant, etc.).
- Keep meticulous records of hours worked, amounts paid, deducted, and remitted.
- Collect employee Social Insurance Numbers (SINs) within three days of when they begin working for you.
- Have employees fill out a TD1 form.
- Calculate gross and net pay.
- Calculate deductions (CPP, EI, federal and provincial tax).
- Remit payroll deductions, taxes, and contributions.
- Report tax collected on a T4 or T4A slip.
- Provide pay stubs that indicate deductions.
- Issue payment (direct deposit, cheque, cash, etc.).
What is a Payroll Account?
An employer, trustee, or payer of employees is given a 15-character payroll account number (contains a 9-digit business number, two-letter code, and four-digit reference number) to identify the business when communicating/dealing with the Canadian Revenue Agency.
What is a T4 Slip?
A T4 slip is a statement of remuneration paid and reports employees’ pensionable, taxable, and insurable income, EI premiums, CPP contributions, and employment income (including allowances and taxable benefits).
What is a TD1 form?
A TD1 form, also called a personal tax credit return, provides information regarding an employee’s tax situation, enabling the employer to deduct the correct amount of tax from his/her pay. It is completed when:
- A new employee starts work
- An employee alters/modifies the amounts of claims and/or income
- An employee wishes to increase the amount of taxes deducted at the source
- An employee wishes to claim deductions for living in a particular area
- An employee is beginning to receive a pension
How to Register for a Worker’s Compensation Account
Workers’ compensation insurance provides employees with the benefits and/or services needed to get back to work safely after an injury occurs. If your business is required to have workers’ compensation coverage, you need to open an account within 15 days of hiring your first employee.
What Happens if You Fail to Deduct the Correct Amounts?
If you fail to deduct the correct amounts and/or miss the remittance deadline, you are subject to up to a 10 percent penalty of what should have been remitted and/or deducted. If you are found guilty of gross negligence, the penalty could rise to 20 percent of what should have been deducted/remitted.
Payroll remittance errors cause employers problems and lead to penalties from the CRA (fines, interest, and other fees). It pays to establish a clear, accurate payroll system through the use of CRA-compliant software or the services of a payroll specialist (bookkeeper, accountant, etc.).
Need help with corporate accounting and/or tax planning? Contact Cook and Company Accountants. Whether you manage a sizable corporation or a sole proprietorship, our experience/expertise can make tax time a breeze. Contact us for a complimentary consultation.
