Employees are the heart of any workplace, and understanding your payroll process ensures a healthy heartbeat. It is essential to know the ins and outs of how payroll works so that you can maintain a successful and compliant business. 

This easy-to-follow payroll guide will help you paint a clear picture of the payroll process as a business owner in Canada.

Payroll Basics - The Canadian Standard

A basic payroll definition is that it’s a business’s process of tracking and managing all financial matters surrounding employees. Although this process can be a little overwhelming at first, once you get past the initial setup, it becomes pretty straightforward.

Firstly you’ll need an employee. It could even be yourself, it isn’t uncommon for small business owners to pay themselves as an employee.. Next, you’ll have to gather their personal information along with the following:

• The federal and provincial TD1 form (completed and signed)
• SIN (Social Insurance Number)
• Date of birth
• Job title 
• Hourly rate of pay 
• Mailing address
• If being paid via direct deposit, then you’ll need their bank details
• Phone number, email address or other contact details

You’ll also need to determine in your contract if the payroll pays them weekly, bi-weekly, semi-monthly or monthly. In Canada, the more preferred payment frequency tends to be bi-weekly.

A helpful source of information for business owners is the Canadian Payroll Association. It’s a national organization that acts as a liaison between the government and businesses to make payroll administration efficient. Registering with them  , as a member, means you’ll have access to valuable resources to manage your payroll better.

What are the Components of Payroll?

As a small business owner, there are several components to payroll management that you need to keep track of. These components are not only necessary to run payroll, but are also required by provincial and federal governments. These four main components include:

1. Gross income
2. Employee benefits 
3. Employee insurance 
4. Payroll taxes

1. Gross Income

Gross income, or gross pay, is the total amount of money an employee  earns in a pay period before any deductions or taxes are taken out. 

Calculating gross income will depend on whether the employee is paid hourly or is a salaried worker. To find the gross income of hourly employees, all that is required is to multiply their hourly pay rate by the total number of regular hours worked. If the employee works overtime, the overtime hours worked must be multiplied by the overtime rate of pay. Then the two figures are added  to find the total gross wages per employee.

For salaried employees, the gross pay is a set amount every payroll period. Any bonuses given within a pay period must be added to the total gross income of  hourly and salaried employees.

2. Employee Benefits

Employee benefits are part of an employee’s compensation package, which must be deducted from the payroll and varies  from business to business. Depending on your business, you may or may not have employee benefits tied to  payroll. This is a decision you will need to consider when hiring employees. Offering benefits to your workers  shows them you are invested in them, not just their work. Offering a quality employee benefits package is one way to attract and retain your employees. 

3. Employee Insurance

Canadian employers are required by law to withhold contributions to the Canadian Pension Plan (CPP) and Employment Insurance (EI) premiums for all employees aged 18 to 70. Employers  in Quebec must contribute to the Quebec Pension Plan (QPP) instead of the CPP.

Employee insurance is paid by both the employer and employee, as it funds  maternity and paternity leave, as well as sickness and compassionate care. 

4. Payroll Taxes

Taxes are a mandatory form of deduction that must be taken from a person’s gross income. Payroll tax is a separate form of taxation and differs from federal income tax. Each province has applicable payroll deductions, as shown on the CRA’s payroll deductions table.

The Canada Revenue Agency (CRA) mandates that all businesses must set up an account with them through the Business Registration Online (BRO) service to receive a Business Number. As an employer, you must set up this account before the first remittance due date, allowing you to pay the Canadian government’s payroll taxes.

How to Set Up a Payroll in Canada?

Some corporations choose to outsource their payroll, but small businesses can cover this responsibility internally with the use of accounting software. There are various benefits and advantages to using payroll software to help your company keep accurate information and organized records.

You can easily run payroll when you set up your online payroll account in Canada using the Canada Revenue Agency (CRA). To begin the process, you will need to register your business with the CRA to receive a business number for your organization. This unique nine-digit number will help identify your business to the government when filing taxes, including payroll taxes.

How to Calculate Payroll

If you prefer, you can calculate payroll using our payroll calculator yourself. However, it might be easier to hire a specialist or, better still , automate the process with a full-service online payroll software such as QuickBooks Payroll. Payroll software will verify that all payment calculations are correct, accounting for hours worked and applicable deductions, such as benefits, insurance, and taxes, for each employee. 

Learn more about how to calculate your payroll here.

How to Best Manage Payroll

There are a number of  different payroll systems to choose from when managing your payroll: manual, outsourced, or software. We’ve outlined the details so you can choose the best solution for your business. 

Payroll systems - Different ways to process payroll 

Manual

A manual payroll system is the most basic of the three, as  there is not a lot of  technology involved. This process will take the longest to complete because you will be doing all (or most) the calculations yourself - these calculations include any deductions or the tallying of employee hours. You will also be required to track the data and store all the files manually, which means there is much more room for error or lost documents. 

Outsource Payroll

Outsourcing payroll means hiring a company to process your payroll for you. This method will save you time. but, the downside is that you may t need more time to get  instant access to your payroll records. This means that if you need to add something or check something quickly, you won't be able to do it immediately.. You will also be required to share  sensitive company information. 

Payroll Software

Payroll software is a cloud-based solution that automates your payroll process, making it easy to keep track of and manage your records. It also saves you money because  you don’t need to hire a third party to manage your payroll.

Payroll can be complicated and time-consuming, but there are ways to make it easier. No matter how you  process payroll, understanding how it works can help you  manage your business finances. . Managing payroll correctly is necessary for the health of your small business., for building trust with your employees, and for its success. With the QuickBooks payroll feature, your business can easily track employee hours, set up payment schedules, and pay employees  through free direct deposit.

Payroll FAQs

What is an example of payroll?

An example of payroll is when you calculate an employee’s gross pay, deductions, time worked, benefits, and any additional payments. 

What is the purpose of payroll?

The purpose of payroll is to ensure you’ve paid your employees, and tracked the payments, their hours, and the deductions for CRA so that your business runs smoothly and lawfully.

What are the four types of payroll systems?

You can categorize payroll systems into company-managed (in-house), agency-managed (by a payroll service provider), professionally managed (accountants and CPAs) or automated through software( QuickBooks).

Is payroll part of HR?

Yes, as it is an employee-facing process, it is definitely HR-related and not just dependent on the finance department. The payroll and HR departments share a lot of the same responsibilities. 

Disclaimer

Money movement services are provided by Intuit Canada Payments Inc.

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