Once you hire your first employee to support your growing business, although they take on some of the day-to-day responsibilities of running your business, they also ironically add a few new responsibilities for you – namely payroll. As a result, you should set up a payroll system for your business ASAP so you aren’t distracted by this new, often time-consuming task. To help streamline your payroll process, here we explain how to set up a payroll system for small businesses.
Why is having a payroll system important?
The CRA penalizes businesses that don’t collect and remit employee tax deductions correctly and on time. As a result, if you want to avoid unwanted tax bills and fines, having an effective payroll system in Canada is important. However, you also want to ensure you’re paying your team accurately and processing their tax deductions properly so they avoid owing money to the CRA themselves. Proper payroll procedures help keep your employees happy while making your life easier.
How does payroll differ between Canada and the U.S.?
The main differences between Canadian and American payroll are as follows:
U.S. employers pay:
- Federal and state income tax
- Unemployment tax
- Social Security
- Medicare
- Local taxes
Canadian employers pay:
- Federal and provincial income tax
- Canada Pension Plan (CPP)
- Employer Health Tax
- Workers’ Compensation
- Employment Insurance (EI)
What are the most critical steps to setting up payroll?
When setting up your initial payroll management system, you need to ensure you don’t miss the following critical steps:
Open a CRA payroll account
If you have a business number (BN) and account with the CRA, log into your account and choose “add a payroll account”. This generates the 15-character payroll program account number that applies to all your payroll tax remittances and tracking communication. If you don’t have a BN, go onto the CRA website here to start the process. Québec employers need a Québec employer’s kit, which you can find here.
Collect the right employee information
For each new hire, you require their Social Insurance Number (SIN) and a completed Federal TD1 and Provincial TD1 form for your records. The forms tell you how to calculate each employee’s tax deductions. In Québec, you’ll also need your employees to fill out the TP1015.3-V Source Deductions Return form.
What must your payroll system address?
There are several things you want your Canadian payroll system to address, including:
Collect deductions
You will need to deduct all the suitable deductions your employees must pay out of their gross earnings, including:
- Federal and provincial income tax
- CPP contributions
- EI premiums
However, you also must contribute your own share of deductions, which includes matching the CPP paid by the employee, and $2.32 for every $100 in insurable earnings for EI. Therefore, using a payroll system that automatically calculates these deductions for you is the best way to ensure you remain compliant with proper calculations.
Remittance
Each month, you need to remit your deductions to the CRA, usually on the 15th. The easiest way to do this is through the CRA website. However, you can also use your financial institution or online banking account. Prompt payment is necessary if you want to avoid late penalties and interest on unpaid deductions and previous penalties.
Because the penalties are based on the day the remittance is due, you will find that your penalties and resulting interest can add up quickly. Maintaining a perfect compliance history helps establish you as a reliable employer, which means you can become eligible for quarterly payments if you prefer.
Non-government deductions
You might also have non-government deductions such as benefits, insurance, RRSP contributions, union fees, etc. that you choose to make. These can also be quite complicated, although they don’t put you at risk of penalties.
T4 slip preparation
At the close of the year, you must prepare and distribute T4 forms to your employees showing what each person was paid and the deductions made. This provides the necessary information for employees to file their income taxes. You then need to submit your T4 summary to the CRA by the end of February. In Québec, the T4 equivalent is the Relevé 1 slip, along with an employer summary that shows the gross salaries paid and Québec deductions at source withheld.
What are the pros and cons of manual vs. automated payroll systems?
The burden of proof is on your shoulders to show your numbers are correct, you paid on time, and you’re compliant with all CRA-related deadlines, rules, and responsibilities. We find life much easier for business owners who use an automated payroll system leveraging the latest in payroll and accounting software. A software program that includes an approved, updated tax deductions table will ensure your calculations are always accurate and in turn, so are your employees’ cheques or deposits. This reduces employee complaints and time spent correcting errors.
Automation does almost everything for you, while using a manual payroll system requires manual calculations and data entry. This increases the odds of human error and, in turn, penalties. With automation software, you not only reduce the risk of errors but also have an invaluable tool that does most payroll-related tasks. Whether you choose to use the software yourself, provide it for your bookkeeper, or outsource your payroll to a team that leverages technology for you, you can streamline the payroll process and ensure every step is handled properly, including:
- Processing deposits
- Tax remittance
- T4 preparation
- Sending out direct deposits or preparing cheques
- Creating payroll reports
- Avoiding tax withholding errors
What manual tasks might still be required with an automated payroll system?
It depends on the payroll system software you choose, as well as how you integrate your payroll system with time tracking, punch clocks, manual timesheets, time off requests, etc. The less integration there is, and the fewer features your system has, the more likely it is you’ll have to contend with manual tasks. Some common missed tasks for payroll automation include:
- Entering new hire information
- Managing employee exits
- Vacation time and sick leave calculations
- Salary changes/payroll adjustments
- Bonuses/commissions
- Benefit, health, RRSP or miscellaneous company perk-related deductions
- Union deductions
- Payout for business expenses
- Overtime
- Approvals for overtime
- Consolidation of any information that calls for payroll adjustments
As you can see, setting up a payroll system can be quite complicated. The more employees you hire, the more complicated it becomes and the more time it takes. Hiring a Bookkeeping, Fractional CFO or Corporate Tax service to assist can set you off on the right path for accurate, compliant payroll, addressing every aspect of an effective payroll system.
Call Intrepidium today at 778-800-7976 or click here to schedule a consultation.
