Understanding business is tough enough, but as the rules begin to pile up – especially those concerning Canadian payroll – it can be rather intimidating. This comprehensive guide will help you navigate the potentially stressful world of payroll management and foster a healthy company.
Payroll Best Practices – Dos and Don’ts
There are definitive best practices when it comes to payroll. For instance, are you sure your employees are classified correctly, and that you have a set payroll frequency and a communication plan? Do you use electronic pay statements? All of this can seem overwhelming, but it doesn’t have to be once you know the facts.
Classifying employees correctly
To be certain you have classified your employees correctly, you can use the Four-Point Test – the standard by which the Canada Revenue Agency discerns if the person performing duties for you is your employee or an independent contractor (document RC4110). These four points are: control, ownership of tools, chance of profit/loss, and integration.
From the perspective of the business owner:
1. Control – who has it? Do you set the schedule, workplace, and duties for the person who is completing the work? If you do, you are an employer who has hired an employee. If the person performing the agreed-upon duties sets their own schedule, works wherever they choose, and performs the duties within a given period of time (such as a content writer for your blog with a deadline), you are part of a business relationship.
2. Tool ownership – who owns the tools that are being used, or are required, for the completion of the agreed-upon duties? If you do, you are the employer. If not, it is considered a business relationship.
3. Chance of profit or loss – which party stands to make a profit or could potentially see a loss outside of the agreed-upon payment for services? If the person providing the services bears this weight, this is a business relationship. On the other hand, if there is no chance of profit or loss for the other party, then this is considered an employee-employer relationship where you are the employer.
4. Integration – are the services that are being provided becoming enveloped within the fold of your company? Or does this person provide these same services to several different people outside of your company? If the duties/services are only being provided to you, and the party works around your schedule, you are an employer. If the provider has their own place of business and provides these services to several clients, then the provider is an independent contractor.
Where this gets sticky, is if this person falls into this latter category, but you are their only client. CRA uses this fourth point as a means of gauging the first three – acting as though an employee is an independent contractor (and vice versa) is not only a bad business practice, but it is also illegal.
Determining your payroll frequency
What is payroll frequency? Payroll frequency simply means how often you pay your employees for the work they have performed during that specified time frame. Payroll frequencies can be weekly, bi-weekly, twice per month, or once per month.
It could be more or less work, depending on the frequency you choose, but if you create your payroll schedule at least a year in advance, it can simplify a lot of your calculations later on. If you choose to utilize a payroll management system like QuickBooks, you can eliminate a lot of this tediousness.
Payroll communication plan
Once you’ve chosen your payroll frequency, it is important to employ a plan that will ensure that you and all of your employees are on the same page when it comes to issues like how and when they are paid and which benefits are included with their salary. Excellent communication is at the heart of a fruitful employer/employee relationship. In fact, nothing will operate smoothly within your business without this communication. So how do you execute it effectively?
Let’s say you schedule a mandatory employee meeting to discuss the company policies and procedures. Unfortunately, some employees may not show up at all. The ones who do may not really want to be there, and not every employee will be paying attention.
It is imperative that any communications regarding pay frequency, benefits, or employee expectations are in writing. Once you have established your policies and procedures, you’ll need to have periodic meetings in order to address any situations that may arise – and they will arise.
For each department a policy or procedure pertains to, appoint a department head. Each department head must understand their role. When employees have questions regarding policies and/or procedures, they will know exactly who to approach for answers. This open line of communication will help to ease some of the many potential issues that can arise with payroll and its processes.
Each employee should be given a handbook that outlines how your payroll operates, how you classify employees (as opposed to independent contractors), their rights and responsibilities, and how you will handle any mistakes that arise during payroll management.
Electronic pay statements
An employee is entitled by law to be given a statement of wages earned in a given time period. This time period aligns with your payroll frequency.
According to the Canadian Payroll Association, these “bare minimum” items should be on your employees’ pay statements.
It may be a cost-effect measure for your company to opt for paperless, or electronic, pay statements. The safest and easiest method is to email your employees their electronic statements. If you choose to have employees login to a company site to retrieve their statements, it is imperative that security precautions are taken, such as having a secure site from which to access the statement.
It is also important to consider the privacy of your employees and to ensure they have a confidential means of accessing and printing their electronic pay statement whenever they choose to do so.
Which Payroll Solution is Right for Your Business?
No matter the number of employees, the payroll function of a business is often much more arduous and costly than it needs to be, especially when your business is growing. With so much at stake, including legal, tax, and regulatory issues, employee morale, cash flow considerations — not to mention overhead costs — it is critically important for businesses to find the most effective and efficient payroll solution for their current and anticipated needs.
Manual Payroll System
A small business with just a few employees could get by fairly easily with a manual payroll system consisting of a spreadsheet and a calculator. To make things easier, there are free online payroll calculators that will compute pay, tax withholding and benefit plan deductions.
Pros of Manual Payroll Systems
- Lowest cost
- High degree of control
Cons of Manual Payroll Systems
- Can be work intensive and time consuming
- Greater possibility of errors
- Reporting and deposits must be done manually
Online Payroll Service
An online payroll service can be a cost effective solution for smaller businesses that would like to free up staff time. The service operates strictly in the cloud and can be accessed anywhere there is an internet connection.
Pros of Online Payroll Services
- Quick and easy once the data has been uploaded
- Payroll calculations and tax payments done automatically
- Payroll can be accessed anywhere by computer, mobile app or tablet
Cons of Online Payroll Services
- Loss of control of the data
- May require back and forth communications to correct errors
- No access if internet connection is unavailable
The moment the payroll function begins to impede on the operational efficiency and bottom line of the business, this is the time when you should consider upgrading your payroll process. Better yet, business owners need to anticipate their payroll management needs and consider solutions that can evolve along with the business.
Payroll Remittance: Critical Tax Information and Resources
The most important aspects of managing your payroll are payroll deductions and remittances. If you are a new business, the idea that these figures must be correct and exact amounts subsequently forwarded to the Canada Revenue Agency (CRA) at specific intervals – and the fact that the CRA has the right to audit you if something doesn’t quite add up – can be truly frightening. Good news! It doesn’t have to be.
What are payroll deductions and remittances?
Payroll deductions are amounts you must withhold from your employees’ wages. Before you can begin your withholding, you must have an account with CRA. This payroll management deductions account allows you to submit these deductions to CRA. If you already have an account with CRA, this step is simply adding the payroll deduction account. If you do not have an account, you will need to apply for a Business Number, which you can apply for online, by phone (1.800.959.5525), by fax, mail, or in person.
After you’ve acquired your Business Number, you’ll be able to register for a payroll deduction account. Obtain the required information from your employees such as their Social Insurance Number (SIN) and their TD1 forms, both federal and provincial. The employee’s TD1 form illustrates how much tax must be withheld from their wages.
Be sure when you record your employees’ information that you do so correctly and also be vigilant during your hiring. When you are given a SIN card, be wary of a card with a ‘9’ as the first number. This means this individual is not someone you can hire, and normally has to do with his or her citizenship or immigration status.
There are various types of deductions, such as:
- Canada Pension Plan (CPP) contributions
- Employment Insurance premiums
- Federal, provincial, and territorial taxes
In most cases, CPP deductions are calculated for employees between the ages of 18 and 69 who are in a pensionable career, able-bodied, and not already receiving another pension. For employers in Quebec, the province has its own pension plan separate from the CPP, the Quebec Parental Insurance Plan (QPIP), which has its own set of tax tables.
There are tax tables that illustrate how much to withhold based on total taxable income for federal, provincial, and territorial taxes. Provincial and territorial taxes are based on where the employee works – not where they live.
Employment Insurance (EI) premiums are deducted from an employee’s wages, based on every dollar of earnings that are insurable, up to the EI yearly maximum. Your portion as the employer is 1.4 times this amount. If you offer short-term disability plans through your company, you may be entitled to a lower EI rate. There isn’t an age limitation for EI premium deduction. As with the QPIP, there are different EI rates for companies and employees within Quebec.
All deductions must occur at each payment interval. If you pay your employees weekly, these deductions must be calculated against the employee’s total wages for that week and subsequently withheld. Be sure that you have added any taxable benefits to your employee’s total income before applying any deductions, or you won’t have the correct final figures. If you fail to remit the correct amounts, you are subject to a ten-percent penalty.
Once you have withheld these amounts from your employees’ wages, you must keep track of each amount from each employee. QuickBooks accounting software is a great way to manage this information. As it nears your remittance date, fill out your remittance form for the totals of each type of withheld income. Then remit these amounts along with your remittance form to the CRA according to the schedule that you have set with them.
These calculations and subsequent remissions are the absolute most important aspect of your business, regardless of the type of business you own. Your remittances must be on time and your calculations spot-on. If you are unsure of the exact amount that you should be withholding, here’s a handy payroll calculator to ensure you get your numbers right the first time.
What does a typical remittance schedule look like?
Before you can actually remit your payroll deductions, you must calculate the average amount all deductions will equal each month. This is calculated by totalling all deductions paid to CRA in one year, divided by twelve. If you are a new business, you’ll be classified as a New Remitter. Once you have been in business for at least two years, that two-year history is used to calculate your average withholding amount per month, or AMWA.
After two years of business, you can be classified as one of these types of remitters:
All new remitters must submit payments by the fifteenth of the month after the one in which the deductions occurred. For example, for all deductions in the month of April, your remittance is due by May 15. Regular remitters follow this same schedule and are classified as such if they don’t yet have two years’ worth of average monthly withholding amount (AMWA) history or the two years of history they do have is less than $25,000 in remittances.
Accelerated remitters fall into two different categories and only if there are two years of AMWA history to calculate. Remittance deadlines vary by the amount of AMWA submitted in those two years.
Small businesses can qualify as a quarterly remitter by meeting stipulations of a $3,000 or less AMWA in the two years prior and with no non-compliance marks against the company. As a quarterly remitter, remittances are due no later than the fifteenth day of April, July, October, and January for all payroll that was processed in the quarter prior. You will also be subject to CRA’s annual review to maintain your status as a quarterly remitter.
Accepted remittance payment methods
Best practices to avoid penalties from the Canada Revenue Agency
There are several reasons the CRA can penalize a company, but the most notable are for late instalment payments and for failing to file. The latter applies if your filing is not received in a timely manner. You can be assessed five-percent (of the amount due) late payment fees as well as a one-percent fee for every month your payment is late.
Instalment penalties may apply to corporations that have more than $1000 of accrued interest on their late payment. At this point, the late payment, the accrued interest, and the penalty would become due. Interest is figured at 6% and compounded daily. Your business can avoid these late payment fees by ensuring that your HR and Payroll departments are handling their duties in a timely fashion. If you do not file late, you will not be assessed penalties.
You can be assessed penalties for other items, such as incorrectly calculating the amount of tax to withhold from an employee. It is also important to be certain, if an employee of yours also works for another employer, that employee cannot claim personal tax credits from both employers. This information can be garnered from the employee’s TD1 form – at the same time, it is vital that your payroll department remain vigilant.
Note: an employee does not have to fill out a TD1 each year – only at the time of original hire. If the employee has a change, such as a disability that occurs during the time of employment, or the employee gets married, this is the time that he or she would have to file a new TD1 with you within seven days.
From time to time, the CRA may perform an audit of your company’s books. If your business is new, you may be more susceptible to an audit for reasons such as potential accounting errors or a previous indication of tax-obligation non-compliance.
The CRA is constantly cross-referencing the information within its own files against what you report for any aspects that may point to potential non-compliance. You can catch potential issues by having an independent, outside agency perform annual or semi-annual audits of your business for you.
When hiring the personnel for your HR and Payroll departments, it’s vital that you do your homework. If you hire someone who does not completely understand their role, or worse, that does but is not vigilant regarding their completion of it, ultimately it affects you and your company – the burden rests with you. For anyone working in a Canadian payroll department, payroll certification is crucial.
The CRA will either come to your place of business (typical) to perform the audit, or will perform the audit from their offices (not as typical). During the audit, any of your personal information – any information that could be related to the conduct of your business – will be investigated.
This includes your books, your personal account information, and any personal information regarding any other individuals who may or may not work for you but have some type of relationship to you or to your company.
There are one of three outcomes that may apply to your situation at the completion of an audit:
- No adjustment: It will be found that all was correct, there will be no further action taken, and the audit will be closed
- Adjustment in favour of CRA: it may be found that your accounting was off, resulting in not enough taxes having be remitted – you will owe a balance
- Adjustment in favour of company: it may be found that your accounting was off, resulting in an overpayment of taxes, to which you may or may not be entitled a refund
If you do not agree with the final outcome of your audit, you are encouraged to submit an appeal.
How to Manage Payroll
To properly manage your payroll department, it is essential that you have three main ingredients:
- Internal payroll experts
- Experts are certified through the Canadian Payroll Association (CPA), and
- External assistance for questions for which you or your payroll department has no answers
Canadian Payroll Association
The Canadian Payroll Association is a professional development group that is dedicated to assisting small businesses, larger companies, and corporations with their payroll management needs. The CPA provides continual learning opportunities including accounting procedures and legislation that affects payroll departments across the country. Their courses range from introductory to advanced and include such aspects as compliance.
As you can see, there are many resources available to ensure that your payroll management is as efficient as possible and that your policies and processes abide by the law. Other businesses like yours take solace by using QuickBooks software for all their accounting needs, especially payroll. See how much more simplified your payroll processes can be.
5.6 million customers use QuickBooks. Join them today and start doing payroll online.