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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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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.
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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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.
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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:
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.
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Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
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