If you run a business and have employees or you're thinking about hiring employees, you need to understand payroll accounting. Payroll is often the largest expense for a business, and there are many steps that go into ensuring your employees receive an accurate paycheque at each pay interval.

Let's dig into what payroll accounting is, how it works, and why it's an important task for managing your business. 

• What is payroll accounting?
• Do you need to set up a payroll account?
• How to register a payroll account
• How to set up employee payroll
• How to calculate payroll deductions and contributions
• Why is payroll accounting important?
• How to streamline payroll accounting
• Payroll accounting FAQ

What is Payroll Accounting?

Payroll accounting is the process of paying your employees the right amount at the right time. It also involves recording all payment information, including the total amount paid plus deductions and contributions, so you can manage employee salaries and wages.

The task of payroll accounting is often managed by an accountant or human resources (HR) professional. However, as a small business owner, you may have to take on this role.

Do you need to set up a payroll account?

As an employer, you typically need to set up a payroll account if you pay your employees:

• Salaries
• Wages
• Bonuses
• Vacation pay
• Tips or gratuities

You also have to register for a payroll account if you need to report, deduct and remit other types of remuneration, such as a pension.

A payroll account is a 15-character number that consists of a 9-digit business number (BN), a 2-letter code, and a 4-digit reference number used to identify each account.

If you already have a business number, you can add a payroll account to the existing BN. You must register for a payroll account before the first remittance due date, which is the 15th day of the month following the month you began withholding deductions from your employee's pay. If you don't have a BN, you can ask for one and register for a payroll account before your first remittance is due.

If you've already hired employees and haven't opened a payroll account, it's still your responsibility to calculate deductions and remit them by the proper due date.

Business owners in Quebec may need to register with Revenu Québec in addition to registering with the Canada Revenue Agency (CRA). 

How to register a payroll account

To register a payroll account, you'll need the following information:

• Date employee receives first wages
• Months covered for payroll of employees' wages
• Type of pay period (weekly, bi-weekly, quarterly)
• Number of employees
• Payroll service name (if applicable)
• Country of parent company or affiliate, if you have a foreign-owned corporation
• Name of franchisor and country of franchise's head office (if applicable)
• Mailing address
• Physical address

The fastest way to register is by using the government's online tool. You can also register by mail, fax, or phone. 

How to set up employee payroll

As an employer, it's your responsibility to deduct, remit, and report payroll deductions.

Before you can pay your employees, you'll need to collect the following information:

• Social insurance number (SIN): Ensures the employee is legally allowed to work in Canada. If you hire an employee who doesn't have a SIN, you must contact Service Canada within six days of the employee's starting.
• Province of employment (POE): Ensures the proper deductions are withheld. Income type, employee resident status, and the location from which employees are paid are used to determine the POE.
• Completed TD1 form: When an employee starts a new job or wants to increase income tax deductions, they need to complete a TD1 form (Personal Tax Credits Return). Use this form to determine how much tax to withhold. 

How to calculate payroll deductions and contributions

As an employer, you, your accountant, or your HR professional must determine how to calculate payroll deductions and contributions, which include:

• Canada Pension Plan (CPP)
• Employment Insurance (EI)
• Income tax from benefits and special payments

You typically need to deduct CPP, EI, and income tax from an employee's salary, wages, commissions, bonuses, honorariums, most taxable benefits, and some tips and gratuities.

When performing payroll accounting, you can decide if you want to do it manually or if you want to use a payroll tool such as QuickBooks.

If you decide to do it manually, you can use an online payroll deductions calculator to calculate federal, provincial, and territorial payroll deductions (not including Quebec).

If you live in Quebec, you can use Revenu Québec's WebRAS for payroll deductions. 

What happens if you don't withhold deductions?

If you forget to withhold deductions, you will have to pay a penalty and interest charges.

• Penalty: 10% of the amounts that weren't deducted, or 20% for amounts that weren't deducted for a second or additional failure in a calendar year if done knowingly or due to gross negligence.
• Interest: The CRA sets interest rates for every calendar quarter, and the interest is compounded daily. The CRA also applies interest to late payments of assessed penalties.

What happens if you make a payroll accounting mistake?

If you make a mistake, such as under- or over-deducting CPP contributions, EI premiums, or income tax, it's possible to correct these errors. It is also your responsibility to report the issue in a timely manner.

If you paid too much in the current year, you can use the overpayment toward a future payroll period in the current year. Or you can request a refund for the overpayment. If you made an error when calculating deductions and you've already filed, you can visit the government website for detailed instructions. 

Why is payroll accounting important?

Payroll accounting helps ensure you pay your employees the right amount at the right time. This can increase employee morale and motivation, help retain employees, and even assist with recruitment. For most employees, receiving their paycheque on time each pay period is a top priority.

Proper payroll accounting also assists with making sure your small business complies with any provincial, territorial, or federal laws. This can help you avoid paying penalties or fees.

By maintaining accurate payroll records, you can access the information you need if you're audited, and you can help avoid any cases of payroll fraud.

How to streamline payroll accounting

As a business owner or solopreneur, your responsibilities may feel endless. From finding clients to marketing to accounting, you might wear many hats.

Payroll accounting is complex and requires specialized knowledge and expertise. Ensuring that employees receive their wages, bonuses, and benefits — and that you remit all necessary deductions from their paycheque — is a lot of work. To help you streamline payroll accounting and ensure your employees are paid on time, consider using QuickBooks online solutions.

QuickBooks offers comprehensive payroll solutions to help make every step of payroll more efficient. By automating payroll accounting, you can spend your valuable time on other business tasks and goals.