Many small businesses start out with a few contract employees and their payroll needs are few. But as a company grows, it usually needs full-time employees and a payroll system to run like a well-oiled machine. If this is your first time hiring full-time employees, there’s a lot to learn. But with careful attention to detail and the resources available here and from the Canada Revenue Agency (CRA), you can ensure your payroll is set up to run smoothly. Review each step you need to follow to set up payroll, calculate deductions, and maintain your accounting records using QuickBooks in a clear and easy-to-follow manner so you can tackle the task with ease and confidence.
What Is a Business Number?
Before you can even open a payroll account with the CRA, you must first establish a business number (BN) for your organization. A business number is a unique nine-digit number that identifies businesses in matters with federal, provincial, and local governments. The CRA uses your BN to identify your company for all tax matters related to your business, including earnings and payroll taxes.
Your BN identifies your business when you register with any of four major government programs, which include:
- Goods and services taxes/harmonized sales taxes (GST/HST)
- Payroll deductions for employees
- Corporate income tax.
For each program account, your business receives a 15-character account number. The first nine digits of the account number are your BN. Next, a two-letter acronym identifies the program. Lastly, a four-digit number references the specific account. The two-letter acronym that appears in your program account may be:
- RT for GST/HST accounts
- RP for payroll accounts
- RM for import-export accounts
- RC for corporate income tax accounts
All sole proprietors, partnerships, corporations, trusts, and other ownership types receive an individual BN. You use your BN for all your company’s dealings with the agency, so memorize it or keep it close at hand.
Registering for the Payroll Program
Before hiring and paying your first employee, it’s important to determine your first remittance due date. The remittance due date is the date that your company sends information or payments to the CRA. Knowing your remittance due date to submit deductions ensures that you register on time and avoid penalties for late remittance.
Your first remittance due date is the 15th day of the month following the month you begin withholding deductions from your employee’s pay.
Imagine you hire an employee on March 11 and you decide to pay them bi-weekly. You make the first payment on March 25, so your first remittance due date is April 15.
If you hire an employee on March 25 and pay them on April 3, then your first remittance due date is May 15.
Even if you don’t open an account with the payroll program before hiring your employees, you still need to calculate deductions and remit them by the proper due date. If you fail to deduct or you send remittance beyond the due date, the CRA may assess a penalty.
Gathering the Information to Register
Preparing all the necessary information in advance helps make the process go smoothly and saves you from scrambling to gather additional facts. Start by gathering the following information needed to register for your payroll account:
- Social Insurance Number (SIN)
- Income tax return filed with the CRA
- Basic personal information
- Basic business information including your BN
- If incorporated, you need your corporate name, certificate number, date of incorporation, and jurisdiction
Once you have a payroll program account you need:
- Date employees receive their first wages
- Months covered for payroll of employees wages
- Type of pay period (example: weekly, quarterly)
- Number of employees
- Payroll service name (if any)
- Country of parent or affiliate (if you have a foreign-owned corporation)
- Name of franchiser and country of franchise’s head office (if any)
How to get a BN and/or Register for a Payroll Account
You can register for a BN and your CRA program accounts in any of the following ways:
If you plan to register by telephone, via mail, or through fax, you need to complete the request form.
Hiring Your First Employee and Calculating Remittance Amounts
Once you have your business number (BN) and register your payroll account with the CRA, you can hire new employees and calculate the appropriate deductions required for remittance on behalf of each employee. To get started, you need the Social Insurance Number of the employee, then you need to file a TD1 Personal Tax Credits Return.
The Personal Tax Credits Return form is used to determine the amount of tax to deduct from an individual’s employment income. You don’t need to submit either the federal or provincial form to the CRA, but the employee needs to complete the forms, and you need to keep them on file in your offices. You can ask employees to fill out paper copies, or they can use an Electronic Form TD1 and provide you with a printed copy. Most employees only need to fill out this form once, at the start of their employment. They only ever need to submit a new form if they need to make a change to federal and/or provincial tax credit amounts or want to increase the amount of tax you deduct from their paycheques.
To help you determine how much tax to remit for your employee, the Personal Tax Credits Return form takes into account the employee’s dependents and other items that affect the amount of tax the employee owes. The more accurate the information your employee provides, the fewer corrections there are at tax time.
The form asks your employee to estimate the following:
- Annual net income
- Annual pension income
- Annual tuition fees
- Dependents’ ages and net income
- Spouse or common-law partner’s net income
- Amounts your dependent(s) use on their income tax and benefits return
- Amounts your spouse or common-law partner uses on their return
The form also lets employees claim:
- Canada caregiver amounts for infirm children under age 18
- Age amounts for employees 65 years or older
- Disability amounts
The CRA also offers TD1-WS Worksheet for the Personal Tax Credits Return to aid employees in determining their appropriate age amount or Canada caregiver amount.
What Provincial or Territorial Tax Tables Should You Use?
As an employer, you must know each of your employees’ province or territory of employment so you can withhold the proper deductions. This depends on whether your employee physically reports for work at your establishment or place of business. If your employee works from home, they might pay taxes to a different province or territory than your small business.
For income tax, Canadian Pension Plan (CPP) and Employment Insurance (EI) withholding purposes, an “establishment of the employer” is any place or premises in Canada that you, as the employer, own, lease, or rent. It’s usually where one or more employees report to work or where one or more employees receive payment. This doesn’t have to be a permanent physical location. For example, the place of business for a construction company can be one or more construction sites, or the place of business for a carnival can include a shopping mall parking lot. In these examples, the employee’s province or territory of employment is the location of the construction office or shopping centre parking lot.
Example of Employee That Reports to Your Establishment
If your employee reports to your establishment in person, the employee’s province or territory of employment is the same as that used for your office.
Your head office is in Ontario, but you require your employee to report to your place of business in Manitoba. In this case, use the Manitoba payroll deductions tables.
Your employee works from a home office in Alberta but occasionally has to report to your Alberta office. You pay your employee from your head office in Ontario. Here, you use the Alberta payroll deductions tables since the employee sometimes reports to your Alberta office.
If your employee doesn’t have to report to your establishment in person (for example, the employment contract says the employee works from a home office), the employee’s province or territory of employment is the one from where your employee’s salary and wages are paid, usually the location of your payroll department or payroll records.
Your employee doesn’t have to report to any of your places of business, but you pay the employee from your office in Quebec. In this case, use the Quebec payroll deductions tables. The employee doesn’t have to pay CPP contributions but may have to pay Quebec Pension Plan (QPP) contributions.
Once you determine the province or territory to use for deducting CCP contributions, EI premiums, and income tax, you can use the payroll deductions online calculator to determine the employer share you need to deduct from each pay period. You also need your employee’s completed Personal Tax Credits form to finish calculating all the deductions you need to take from their pay.
Hold any of the deductions you take from an employee’s pay in trust for the receiver general in a separate account from your operating business account so that you have the funds readily available when it comes time to remit them to the CRA.
Remitting Payroll Deductions on Time to Avoid Late Fees
As an employer, you need to remit the CPP contributions, EI premiums, and income tax you deduct from your employees to the correct agency. For CPP and EI, you also need to remit the employer’s portion to the CRA. Hefty penalties can occur if you’re late remitting your payroll deductions.
1) Determine Your Remittance Due Date
Identify the pay day for your employee. This isn’t the pay period end date. It’s the day that your employees receive the funds from the previous pay period.
Example: The pay period is from July 3 through July 16, but you pay the employee on July 24. You use July 24 to calculate the the remittance date.
2) Calculate Your Average Monthly Withholding Amount (AMWA)
Use the AMWA calculation:
Total the following for the past two calendar years:
AMWA = (CPP + EI + income tax) / Number of months for which you’re required to make payments
Note: CPP and EI (Both the employee and employer portion)
Example for New Business:
You open your business on Jan 1, 2018. You hire your first employee on March 1, 2018. In June, you finally get the time to set up your payroll account with the CRA. You keep the CPP, EI, and income tax aside in a separate account for remittance to the correct agencies, since March 1, 2018.
You need to make payments for four months: March, April, May, and June. The amounts you set aside total $5,000.
AMWA = $5000/4
AMWA = $1250
3) Determine Your Remittance Type and Frequency Using the CRA Table
Use the CRA’s table of remitter types, average monthly withholding amounts, and due date.
Note: If your due date is a Saturday, Sunday, or public holiday, your remittance is due on the next business day after holiday or weekend.
4) Complete the Remittance Forms
Depending on your remitter type, the CRA sends your small business a personalized form to fill out and set up the account. The CRA offers a variety of forms to make filing your taxes as a small business owner easier, whether it’s taxes on employees’s pay or sales taxes.
Late Remittance and Penalties
The CRA can apply a penalty if the following occur:
- You deduct the amounts but don’t remit them to the CRA
- You deduct the amounts but send the remittance late to the correct agency
These are the penalties:
- 3% for amounts one to three days late
- 5% for amounts four or five days late
- 7% for amounts six or seven days late
- 10% if the amount is more than seven days late or if you don’t remit any amount
When you set up your company’s payroll, you need to make sure that you do it correctly the first time to ensure everyone gets paid on time and avoid problems later on. These problems can include penalties for late payments to the CRA. There are ways to make this job easier for yourself or your accounting department. Adding employees to payroll can take mere minutes if you have a little help. Did you know you can pay employees in QuickBooks? Add Payroll today.