More than half of small business owners spend three or more hours per month managing payroll. More than 10 percent spend over 10 hours every month.
What’s clear from these numbers is payroll activities add up. Deduction formulas and confusing tax rules can bog you down.
Our crash course in payroll is here to help. With it, you’ll learn about your choices as well as tips to make processing easier.
If you’ve been wondering how to do payroll, look no further.
Understanding Payroll for Your Business
The first thing to do is understand whether you need to conduct payroll for your business. If you have employees, you must pay them. Hiring your first employee is usually the trigger for setting up an account.
If you’re the business’s sole employee, you don’t need to do payroll. If you hire freelancers or contractors, you’ll treat payments like accounts payable.
When you enter into an employer relationship, you take on new responsibilities. These include collecting payroll taxes and submitting them to the Canada Revenue Agency. You’ll also need to pay attention to factors like overtime and holiday pay.
Payroll itself is the process of paying the people employed by the business.
Setting up Your Account
Once you’ve hired an employee, you need to set up payroll. The first thing you need to do is create a business number with the Canada Revenue Agency.
You may already have a business number. If you collect GST/HST, you likely have a number. If so, you can add a CRA payroll account.
If you don’t have a number yet, register and select the services you’ll need.
You’ll also need to look into provincial requirements. In Ontario, you’ll need to register with the Ministry of Finance to remit the Employer Health Tax. This isn’t a requirement in Alberta.
Next, you’ll want to decide how you’ll do payroll in your business. Some employers pay their employees weekly, while others choose monthly pay periods. A company that pays weekly runs payroll 52 times a year.
Check in with your provincial rules as well. Some provinces have laws about how often you need to pay your employees.
When deciding pay periods, you’ll also want to think about:
- Your business cashflow
- Whether employees will be paid in arrears or to-date
- How easy it will be to follow a consistent schedule
If you’re handling payroll for 10 employees on your own, doing it every week may not be the best plan. You want to stick to the schedule once you create it, so be sure to pick a manageable one.
Choose Your Processing Method
The next decision to make is about how you’ll process payroll.
Many business owners process themselves because they’re not aware of their options. You can work with accounting professionals who offer payroll services. You could also work with a payroll provider.
If you do choose to keep processing in-house, you should think about payroll software. Software often means you’ll spend less time processing. It usually means fewer errors too.
You can even use online payroll services. These are usually cloud-based services you can use for a monthly fee.
Payroll is often time-consuming because there are so many little details to keep track of. Basic payroll is simple enough. You calculate an employee’s earnings, often using one of three methods:
- Hourly wages, where an employee is paid a set rate for each hour worked
- Salaries, which is an annual amount broken down over the number of pay periods
- Commission, which combines a base salary with earnings on performance
Different types of employees may be paid using a different method. You may pay salespeople using the commission model. This usually gives them incentive to sell more, since they’ll earn more.
Senior employees don’t usually need incentive to work harder. You may pay them a salary. In some cases, they may also get performance bonuses, such as when the company does well.
Retail cashiers, factory employees, and many others are often paid by the hour. Their hourly rate is set. The more hours they work, the more they earn.
You may use just one or all three of these models in your business. This can complicate payroll, since you have to be sure you’ve set up each employee’s account correctly. If employees also earn different rates, you’ll need to be sure that’s reflected on their accounts.
The situation becomes even more complex from here. Did an employee work overtime? If so, how many hours and what rate should you use when calculating their wages?
Holiday pay and vacation pay are also concerns for employers. You might offer sick days or other forms of leave to your employees as well.
Deductions and Withholdings
Once you’ve finished calculating employees’ earnings, you’ll face another challenge. As an employer, you’re expected to withhold certain amounts from an employee’s paycheque. There are a variety of payroll deductions:
- Income tax withholding
- Canada Pension Plan deductions
- Employment Insurance deductions
- Provincial deductions
- Deductions for benefits
You’ll need to withhold income tax for both the federal and provincial level. Each province and territory sets its own tax rate. Tax rates also change with income level, so the more an employee earns, the more tax they’ll pay.
Every employer must make deductions for CPP and EI. You need to pay both the employer and employee parts. Quebec has its own programs, so check the rates and requirements for this province.
Perks such as the use of a company car might also be a taxable benefit. If you offer a taxable benefit to an employee, you have to add it to their total pay before making deductions.
Remittance Schedules and Penalties
Before you even hired your first employee, you set up your payroll account with the CRA. Once you’ve collected deductions from your employees, you need to send them to the CRA.
You’ll need to determine what kind of remitter you are. You may send the CRA payment once per quarter, or you may need to send the funds four times a month.
This also determines when the funds you collect are due. For an employer following the regular schedule, the due date is the 15th of the month following pay day.
If you don’t remit on time, you could face some hefty penalties. CRA online payroll options make it easier to pay what you owe on time.
Selecting the Right Processing Method
Deductions, remittances, and more make payroll more complex than you might have guessed.
That makes choosing the right processing method all the more important.
Many business owners feel doing payroll is their only choice though. They’re often most concerned about costs. Working with an experienced accounting professional can actually save you money.
First, you get your time back, so you can focus on other important tasks in the business. Next, your payroll will be done correctly every time. You can avoid penalties from the CRA and spend less time sorting out errors on your end.
Many payroll services are also affordable. If you’re not sure they’re the right fit for your business, you can consider online payroll or payroll software.
Both of these methods help you save time by automating some payroll tasks. You’ll still need to enter information, but the program will carry out the calculations.
An online payroll calculator is programmed with provincial tax tables. You just tell it which province you’re in, and it will do the math.
You can also look to the CRA for guidance. They issue formulas for payroll deductions. More information may also be available from the provincial government.
Experts back many online services. They can help guide you through the process.
At the end of the year, you’ll need to fill out and submit a T4 or T5, a payroll information return. This year-end summary reports all employee pay and deductions.
You’ll need to have payroll records on file as well. The CRA may ask to see them during an audit. Provincial authorities can also ask to see these records.
You should also keep your employees’ information up to date. If someone’s name changes, this could pose a problem. The address in your payroll records needs to match the employee’s current address.
If you use the right software or service, keeping records is simple. A service provider should be able to supply the documentation you need.
Don’t Struggle on Your Own
Unless you’re a trained payroll professional, you’ll likely find this side of running your business complex. Trying to handle payroll all by yourself can lead to mistakes and penalties.
Whether you do payroll online or by hand, don’t hesitate to get in touch with the experts. We can make payroll a much smoother process for your business.
Until the next time,