Using payroll direct deposit to pay staff wages benefits your small business in multiple ways. A direct deposit system transfers employees’ wages into their bank accounts electronically from your payroll funds, leaving you time to focus on the big-picture issues facing your company.
Direct deposit is also a convenient payment method for your employees, who appreciate not having to take time out of their busy schedules to cash their cheques. You free them from the worry of losing or damaging that scrap of paper. Doing away with paper cheques also means that you’re moving closer to a paperless office, which helps the environment.
Setting Up Your Small Business Payroll
Managing payroll effectively can be tricky and time consuming for small business owners. Before you consider moving to payment by direct deposit, make sure you’ve got the basics in place. It’s a lot easier if you have a high-quality software package that handles the complexities of managing payroll smoothly.
In addition, you should already have your entire payroll operation online with all employees included and a bank account in place established solely to fund company payroll. Having this bank account in place makes it easy to track funds to ensure you have enough to pay your staff’s wages each month.
It can be tempting to pay your employees and/or contractors in cash, especially when you first start out, but there are a number of reasons why this is not a good business practice. Cash payments can look slightly suspect, as though you’re trying to dodge paying the correct taxes. The Canada Revenue Agency (CRA) is anxious to stamp out what it calls the “underground economy,” and it actively encourages citizens to report illegal activities.
There’s also a risk that, despite your best efforts, your employees and/or contractors may fail to declare their income from you to avoid paying their taxes. Also, by not putting your employees on the payroll, you may be preventing them from receiving benefits and protections such as Employment Insurance (EI) and Canadian Pension Plan (CPP) payments. Avoid potential problems by adding each new employee to your payroll as soon as they join your company.
The CRA is keen on helping small businesses understand their legal obligations, and its website provides a payroll calculator tool to help you work out how much income tax, CPP, and EI to deduct. Payroll errors can be costly, and missing vital CRA tax reporting deadlines can result in penalties.
If you can afford it, employ a properly trained accountant or bookkeeper to administer payroll as part of their duties. Otherwise, avoid expensive fines and damage to your reputation by using a software package such as QuickBooks Online. This software helps simplify the process of paying your staff by making the correct deductions and reporting your payroll taxes accurately.
What Employee Information Do I Need to Set Up Payroll?
When you hire your first employee, you must get their Social Insurance Number and file a TD1 Personal Tax Credits Return. The information on this form helps determine how much tax to deduct from the employee’s income. Keep this form on file, and use the CRA’s online calculator to determine much tax to deduct from each pay cheque.
You also need your employees to supply the following:
- Their full name as it appears on the account into which you pay their wages
- Bank account details
- Current address (because employee tax is based on their home address and not their employment address)
- Date of birth
Other information to collect about your employees includes:
- Hire date and employee number
- Internal department names and codes
- Wages, salaries, and any bonuses
- Whether the employee is full- or part-time, paid on a salary or hourly, and if paid hourly, the number of hours of work per pay period
- Deductions including charity and pension
- Benefits eligibility date if applicable
- Employee’s preferred language for communication purposes
- Home phone number
- Vacation information including accrual per pay period, allowable overdraw, or carryover
- Standby pay
- Reduction of tax at source
Advantages of Moving to Payroll Direct Deposit
There are several additional major advantages to paying wages by direct deposit as opposed to by cheques, including:
Reducing Risk of Fraud and Theft
Paper cheques display all your business’s bank details, including your account number and business name and address. This information could be used for fraudulent purposes and identity theft. Paying your employees electronically keeps this information confidential to you, your payroll provider, and both parties’ banks. Paper cheques can become lost or soiled, or they can even fall into the wrong hands, enabling thieves to take money from your business and employees.
Saving Time, Money, and Effort
The CRA estimates that it can cost around four times as much to process a cheque as it does to handle a direct deposit. One estimate regarding the relative cost of direct deposit showed that paper cheque processing costs $40 per biweekly pay period for a small business of 20 employees. By contrast, processing the same 20 employees’ wages by direct deposit typically costs around $10 (or it can be totally free if you’re using QuickBooks).
It’s also easier for you to view transactions online and note errors immediately than it is to wait for a cheque to be cashed or deposited. If an ex-employee manages to insert an additional figure into their final pay cheque, turning their $1,000 into $11,000, they’ll be long gone before you notice.
You also save time and money because you no longer have to re-issue cheques if they’re lost or stolen, and you don’t have to investigate to uncover what happened to the missing cheque.
Additionally, if you employ a bookkeeper, their workload is reduced when you use direct deposit, as they don’t have to wait around to reconcile records if an employee is slow to cash a cheque. Since all transactions take place immediately, your bookkeeper can generate financial reports the moment payroll funds are transferred.
Increasing Employee Satisfaction
Direct deposit is instantaneous, so your employees have access to their wages on payday. This is especially helpful if an employee is unable to collect and/or cash their cheque when it’s issued because they’re unwell or away from home on business or a vacation.
Your workers are also likely to appreciate having their pay already in their bank accounts, so they don’t have to waste a lunch hour heading to the bank to deposit their pay cheques. Some banks even offer incentives to customers who use direct deposit, so your employees can enjoy rewards points or discounted fees — and they have you to thank for it.
You also avoid the risk of being late paying your employees. If you’re processing payroll manually, an outbreak of flu might wipe out your entire payroll department, leaving you in the lurch as you try to meet payroll. Your accounting department can also fall behind during crunch times of the year, such as during tax season. With direct deposit, one major task is taken off their desks, so they can focus on what matters in the moment.
You can also help your employees practice more effective money management with direct deposit. For example, they can authorize you to redirect a portion of their pay cheque into a savings account. They can also contact their bank independently to set up a TFSA or Registered Retirement Savings Plan that withdraws money automatically from their account before they have the chance to spend it elsewhere. Because employees can rely on timely payment, they enjoy the security of knowing those savings start earning interest from day one.
Some banks even offer free banking services and other benefits for customers with direct deposits. By helping your employees develop good investing and saving habits, you can boost employee morale.
Saving the Environment
Direct deposit is a paperless electronic process. Reducing paper consumption and waste helps limit the impact of your business on the environment and reduces your carbon footprint. This considerably improves your small business’s green credentials.
Minimizing Office Space
If you’ve moved your entire payroll and accounting function online, you no longer need to print out copies of forms, files, and records to store in filing cabinets. Store all such data in the cloud using your QuickBooks accounting platform, making sure it’s printable and kept in accordance with the Standards Act of your province. You’re generally required to keep your employees’ payroll and other employment records for at least three years. That can add up to a lot of paperwork as your company expands or if you have high staff turnover.
Following in the Government’s Footsteps
If employees are reluctant to trust electronic payment of their wages, they might be unaware that the Canadian government is moving toward issuing all payments by direct deposit. In fact, the government expected to save around $17.4 million annually beginning in 2015 by phasing out federal government cheques.
Any of your employees who receive payments from the CRA — including income tax refunds, Canada child benefits, goods and services tax, harmonized sales tax credit, and working income tax benefits — are advised to sign up for CRA direct deposit. If your business receives these payments, that’s another reason to sign up. You can activate CRA direct deposit online, through certain financial institutions, by phone, or by completing a direct deposit form by post.
How Much Does Direct Deposit Cost?
Expect to pay a small one-time fee when you first set up a direct deposit scheme with your bank. You also pay a payroll processing fee for each transaction or activity in the account, such as making a deposit or transferring money. This fee varies by bank and can depend on the relationship you establish with your bank manager.
The good news is you can get payroll direct deposit for free if you’re already a QuickBooks Online subscriber. QuickBooks offers small businesses free direct deposit when you add a standard or advanced payroll plan to an existing account.
How Easy Is It to Set Up Payroll Direct Deposit?
Setting up payroll direct deposit is easy. One of your first decisions involves determining your payroll schedule: weekly, bi-weekly, semi-monthly, or monthly. Most small business owners make their choice based on their cash flow cycle.
Weekly is most common with very small businesses that have a number of short-term hourly employees. Biweekly, which is generally easier to administrate, is the most common for knowledge-based businesses that employ professionals. Semi-monthly, which pays employees on the 15th and final day of the month, should typically be avoided because of complexities that arise when months vary in length. Monthly is most common with commissioned salespeople who have their performance measured on a monthly basis.
You also need to decide whether to process payroll in-house or have a third party handle it. If you decide to process in-house, make sure you have a properly trained person, such as your chief finance officer or an accountant, in charge. Accurate record-keeping and timely processing of payments are vital if you want to produce year-end tax documents and Records of Employment (ROEs). As you take on more employees and your business becomes more complex, you might choose to outsource to a third party.
Other steps involved in setting up payroll direct deposit include:
- Registering with the CRA and establishing a business number so you can make statutory deductions from your employees’ pay, including income tax, EI, and CPP
- Confirming with the CRA that you’ve selected “payroll account” as one of the services you need, or contacting the CRA to get payroll account added
- Deciding whether to pay employees to date or in arrears
Once you’ve set up a direct deposit bank account dedicated to payroll, collect information from each of your employees about the account into which they want you to pay their wages. Upload this information online easily with the help of an accounting software program.
Why Use QuickBooks?
The QuickBooks standard payroll plan prints pay cheques, runs payroll and reports, calculates taxes, and allows you to pay employees by direct deposit at no extra cost. It also assists with filing and paying taxes, as well as preparing and filing year-end forms and ROEs. Its advanced payroll service powered by Wagepoint provides all of the above services. It also automatically does the following:
- Files and pays your taxes for you by each due date
- Pays and files year-end summaries and employees’ forms such as T4s
- Prepares and files ROEs each time an employee leaves
- Gives employees online access to their records
- Pays your contractors
- Calculates, tracks, and pays workers’ compensation
Regardless of the support you may receive from a third party, it remains your responsibility to provide accurate and up-to-date information to your payroll service supplier. For example, if you don’t let them know when an employee has left, the system continues to pay out the wages until you pass along that information. Equally, if you don’t add a new employee to the payroll, your payroll service supplier can’t pay them.
How Easy Is It to Set Up Payroll Direct Deposit With QuickBooks?
QuickBooks supplies step-by-step instructions to help you set up your payroll direct deposit. It also has a timeline outlining the processing time involved in moving to its direct deposit feature. Before you start running direct deposit payroll, keep these facts in mind:
- Because the setup’s timing is crucial, you should select a designated principal officer as your trusted link person, and make sure they’re on hand throughout the process to promptly answer emails requesting essential information such as proof of identity.
- It can take up to two working days to approve your ID.
- The entire setup and verification process can take up to a week, so it’s good practice to begin the setup the day after you’ve finished running a payroll using paper cheques, since you don’t want your account pending when it’s time to run your next payroll.
- You must approve pay cheques that you’re paying through direct deposit by a specific time of day, two banking days before the pay date.
- Completing the risk analysis can take up to three days after the initial setup.
The initial setup is relatively straightforward. It requires you to fill in the fields for Employer Bank Account and Account’s Principal Officer. You then receive a confirmation email asking you to verify your information. Once this is verified, you receive an email that confirms your pre-authorized debits.
Two to three days later, expect to see a small test debit of less than $1.00 removed from your bank account. Follow the instructions to verify this sum. If verification is successful, you’re ready to set up your employees on the system. If this transaction does not appear within three days of entering the direct deposit information, follow the directions to trigger a retest. If your second test also fails, you have one more attempt left, after which you can reach out to the QuickBooks customer care team for help.
What if I’m Unable to Find the Correct Bank to Set Up QuickBooks Online?
Occasionally, small businesses have problems identifying the correct bank when setting up online banking. Some banks have multiple names, making it difficult to select the correct one, and some banks don’t connect online with all types of accounts. Try searching by the banking login URL to ensure you select the right one, or try alternative versions of your bank’s name. If your bank is not yet a participating financial institution, click “Request support for your bank” to ask that it be added to the list.
Setting Up Employees
Assuming all goes to plan, you can next start entering your employees’ details. Collect the following information:
- Employee name
- Employee’s bank or other financial institution
- Bank routing number and account number
- Any alternate account numbers, if the employee chooses to direct some of each pay cheque to savings
- Amounts or percentages to deposit, if pay cheque is split amongst multiple accounts
In addition, ask each employee to complete the Direct Deposit Authorization Form. Check that they’ve completed this correctly before filling in the fields for each employee online. Inaccuracies can lead to delays in paying your employees.
Are Payroll Direct Deposits Safe and Secure?
Unlike paper cheques, which can be lost or stolen, there’s a very limited risk of electronic payments going astray. If the account is set up with accurate information from the employee and you have sufficient funds in your payroll account, regular payments should all go through. Any access to the employee’s bank account is governed by the bank itself. Employees can seek reassurances from their bank about the measures in place to protect the security of their money and personal information.
With the increase in cyber attacks around the world, though, you should take every precaution to keep your banking secure. Basic precautions include:
- Choosing strong passwords.
- Refraining from sharing your user ID and PIN with anyone else other than your trusted finance officer
- Refusing to let your computer or mobile device remember your password and other confidential banking information
- Installing the latest version of a reputable anti-virus software and keeping it updated
- Regularly checking your statements and reporting any unusual activity or unauthorized transactions to your bank immediately
- Closing your screen if you have to temporarily leave your workspace while checking your account online
- Refraining from using public Wi-Fi or public computers to access your bank account
Paying your employees regularly and on time is a vital part of keeping your business running smoothly and maintaining employee morale. Moving to payroll direct deposit is a great way to ensure this happens. Electronic payments free up your time and energy, leaving you to focus on strategic planning. Want payroll direct deposit for free? If you’re already a QuickBooks Online subscriber, you’re covered.