For businesses that are considering hiring an employee or already have a team of employees, figuring out how to do payroll can be an overwhelming process. Although, the process of setting up payroll shouldn’t be ignored or avoided as there can be legal and financial implications. Let’s take a look at everything you need to know from hiring your first employee to more long term needs like annual responsibilities.
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Why Do I Need To Set Up Payroll?
As your business grows, you may need to hire additional help. When doing so, you will need to consider whether you are looking to bring on a salaried employee or one who is compensated hourly. A salaried employee is a worker that is paid a fixed salary per year regardless of how many hours they actually work whereas hourly employees are compensated based on an hourly rate. As the employer, you will be responsible for deducting CPP contributions, EI premiums, and income tax from each paycheque. Payroll systems can also track other pay earnings and deductions such as bonus payments and pension withdrawals.
Another option is to contract a freelance worker rather than to hire an employee. Freelance workers typically charge for specific tasks or projects that they take on and compensation is not subject to payroll deductions as they are not considered to be your employee.
Setting up payroll will help your business stay organized, track pay and deductions, and can entitle the corporation to tax benefits as well, even if you are just paying yourself as an employee to your own corporation. Lastly, using a payroll system can automate the process. Performing payroll duties manually is complex which can cause errors easily.
What Information Do I Need To Set Up Payroll?
In order to set up payroll, you will need to gather information from your employees. This includes their contact information, mailing address, date of birth, social insurance number, bank account information and TD1 forms. Form TD1, also known as the Personal Tax Credits Return, is a form provided by the Canada Revenue Agency that is used to determine the amount of tax that is to be deducted from an employee’s income. In addition to collecting employee information, it is customary and best practices to have an employment agreement in place which clearly states their job duties, compensation and other conditions of employment.
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Steps To Set Up Payroll For Your Small Business
Once you’ve gathered all the information about your employees, it’s time to set up payroll. Below are the steps involved with setting up and maintaining payroll for your employees.
- Gather employee information: As mentioned previously, you will need a number of items from your employees. If you are planning to conduct payroll using direct deposit, you will need their bank account information in addition to personal and legal information.
- Choose a payroll processing method: You can either pay your employees manually with ledgers, cheques, or e-transfers. Alternatively, you can use payroll software to run payroll and calculate remittances. The size of your business and how familiar you are with calculating deductions and remittances should be the key factors in deciding whether to process payroll manually or with the help of software. Keep in mind that manual payroll can be complex and subjected to errors.
- Decide on payroll frequency: The most common payroll frequencies in Canada are bi-weekly and semi-monthly. However, you can also pay employees weekly or monthly. Typically, it is better to use a bi-weekly pay period for hourly employees and a semi-monthly pay period for salaried employees. Although, you may want to consider the cash flow cycles of your business as well.
- Register your business for payroll: Using your business number, you will need to register for a payroll account with the CRA. This can be done by contacting the CRA business enquiries line or by submitting a completed RC1 (request for a business number and certain program accounts) to your tax centre.
- Run payroll: At this point, the setup work is complete, now you can run payroll. If you’re using a payroll software, the first step is to enter the gross amount of pay and manual adjustments. The system will handle the rest. As for manual payroll, you will likely want to use a spreadsheet to track all your calculations in case you need to refer to them again.
- Submit payroll remittances to the Receiver General (CRA): When running payroll, employers need to withhold source deductions from their employee’s pay. This includes CPP, EI, and income tax. Deductions are to be remitted to the Receiver General (CRA) at regular intervals and there can be stiff penalties for businesses that make their remittances late or in error.
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Annual Duties
Each year, businesses are required to prepare a T4 for each employee that worked for them that year. A T4, also known as a Statement of Remuneration Paid, is often referred to as a T4 slip and it outlines all salary, wages, tips or gratuities, bonuses, vacation pay, commissions or other compensation that an employee received throughout the year.
One thing to note is that special payments are considered to be taxable income, but may not be taxed the same way as regular wages. Bonuses can be considered either:
- Supplemental (in addition to wages)
- Discretionary (holiday or performance bonuses), or
- Non-discretionary (non-optional bonuses as stipulated in the employment contract).
A Word On Payroll Systems
Employees are likely the most expensive cost your business will incur. After all, employees are the backbone of any business. This is precisely why the payroll systems are so important.
The payroll system you choose should appropriately service your employees. For example, if your employees are primarily hourly, a system that has time cards and approvals is ideal. On the other hand, if your employees are primarily salaried, then a basic system will usually suffice.
The payroll system should cater to your employees’ needs, whatever they may be. This will make your operations simple in the short and long run. Just be sure to identify what the needs are.
