As your business grows and scales you would potentially need help which generates into a job creation. Once you effectively become an employer there are certain requirements in terms of how employed are to be paid. As an employer, you have a set number of different responsibilities which relate to the payroll process, and it’s vital that you read up and understand these, before you pay your first salary to any employee.
Employer responsibilities in relation to payroll include:
Paying Employment Insurance, known as EI
Paying Canada Pension Plan Payments, known as CPP
Paying income tax for your employee, on a rolling basis
Paying all of the above to the CRA for your employee by the 15th of every month
Producing an information return sheet, known as T4, which gives the employee a record of what they have earned, and what was paid on their behalf (the amounts above)
How to Calculate Deductions
In order to check that the correct amount has been deducted from a salary, the CRA has created a formula to check accuracy. This ensures (as close as possible) that an employee does not need to pay any extra income tax at the end of the tax year, as they will have paid all that is due throughout the year, deducted from their gross income.
When paying CPP and EI, both the employer and employee makes a contribution.
The good news is that you don’t need to manually calculate all of this, and there is an online payroll tool (calculator), which has been formulated by the CRA. You simply input the gross pay over a set period of time, and the results will tell you how much income tax, EI, and CPP you need to pay out of your employee’s salary. If you plan to use this please remember to enter the YTD values every time you run this calculator or your calculations will be off.
You make the payments of these three items online, using your online banking service from your bank, or through the CRA portal, ‘My Payment’. Your employee should then be informed of the ‘net’ pay you’re giving them, e.g. the amount with the deductions taken away (their ‘take home’ pay) in the form of a pay stub.
Do Apps and Services Make Payroll Easier?
How you work your payroll as a business is an entirely a personal decision. The CRA online calculator is a free resource and one which you can rely on to be accurate. Other apps, e.g. from third parties, are likely to have an added cost attached to them, and you will also need to learn how to use the app, which is time added on.
Small businesses, with just a handful of employees, could probably use this online service quite easily, and provide employees with their T4 returns at the end of the year. If however you are a larger business, you may like to think about using an app or outsource service, to streamline the payroll process.
Finding the correct app or service for your business is a time consuming process, but it is one which is vital that you get right. Consulting with your accountant and asking for advice is always a good way to go. A few available payroll systems include Wagepoint, QBO Payroll, Payment Evolution, ADP, Payworks, and Simplepay, and all of them are online options. Research is vital, in order to find the correct payroll solution for your business.
The requirement to pay?
The requirement to pay is sort of like the blue screen of death #Microsoft. It’s not good news ever. It is a common misunderstanding by new employers that you can just pay the ‘net pay’ to the employee and postpone the payment to the CRA as the funds are needed for immediate business growth needs. However, please note that Payroll deductions are considered “trust funds” and are funds that should be kept separate from the general bank account. Businesses who do not adhere to the requirement to submit the PD7a and the payroll remittances on the 15th of the month may be hit with a ‘requirement to pay’ notice.
This requirement to pay notice essentially a bullying tool used by CRA collectors who try to collect money for the payroll taxes and after a few unsuccessful attempts at contacting you they will hit the business owner with the requirement to pay which essentially freezes the bank accounts for the business. We have had clients come to us to get the freeze off their bank accounts and I can assure you that the CRA will not be reasonable or understanding if they are at this stage. Negotiating with the CRA at this stage generally is better with a Tax Advisor and should never be done by yourself.
The key take-away is never use the payroll trust money to fund business operations. It’s far better to get a financing loan to settle these types of short term needs of capital.
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- Written by: Jag Bath