Processing payroll is arguably one of your most important obligations as an employer. Paying your people accurately, on time, and in adherence with Canadian legislation is vital not only to avoid costly penalties and fines, but to the overall success of your business.
Getting started with payroll processing can be overwhelming. As a small business employer in Canada, you have several payroll responsibilities that cannot be overlooked. You must deduct Canadian Pension Plan (CPP) or Québec Pension Plan (QPP) contributions, Québec Parental Insurance Plan (QPIP) and/or Employment Insurance premiums, and income tax. Employers will also need to hold these amounts in trust and remit deductions to Canada Revenue Agency (CRA) or Revenu Québec. Finally, employers are required to report employees’ income and deductions on a T4 information return, and provide their employees with their T4 slips.
Here, I cover the basics of payroll for small businesses so you can stay on top of your obligations as a Canadian employer.
If you pay salaries, wages, tips, bonuses, vacation pay, or other benefits and allowances, you need to register for a payroll account with the CRA. You’ll need to attach your payroll account to your company’s Business Number (BN) which you’ll need before you get started setting up your payroll account.
After hiring an employee, you must obtain their Social Insurance Number (SIN) and ensure you’re using the name and number that’s on the SIN card or letter. You’re required to request an employee’s SIN within three days of their hire date. If the employee doesn’t have a valid SIN, you must show that you’ve made reasonable efforts to obtain it.
If you receive an employee’s SIN beginning with the number 9, this means that the individual is a temporary worker who is not a Canadian citizen or a permanent resident of Canada. You’ll need to confirm that the SIN hasn’t expired, and that the individual has a valid work or study permit issued by Immigration, Refugees and Citizenship Canada. If the SIN is expired, they’ll need to contact Immigration, Refugees and Citizenship Canada to receive a valid document.
New employees will also need to complete a TD1, Personal Tax Credits Return Form within seven days of their start date so you can determine how much federal and provincial tax needs to be deducted from their earnings.
If an employer misclassifies a permanent employee as an independent contractor, they can be held responsible for any taxes they avoided as a result of that misclassification. The CRA can determine that the employer has failed to pay CPP contributions or Employment Insurance (EI) premiums and will be held responsible for the payments, as well as the employee’s share, penalties, and interest.
To help you distinguish between different worker arrangements, the CRA has put together a list of characteristics and guidelines to follow. If the worker works exclusively for the company, is paid vacation pay, or reports to the workplace on a regular basis, they are likely to be classified as an employee. However, if the individual works for other companies, sets their own working hours, decides how tasks and projects can be completed, or is paid on the job or on a predetermined basis, they are likely to be classified as a contractor. Essentially, contractors are self-employed service providers who typically run their own business.
Small business employers are responsible for deducting income tax from salaries or other income that’s paid out. First, you’ll need to add any taxable benefits to each of your employees pay. You’ll need to start by determining if the benefit you provide is taxable and must be included in their employment income when it’s received. Then you’ll need to calculate the value of the benefit and add it to the employee’s income. This will give you the total income from which to make deductions. The CRA provides formulas, tables and a calculator to determine what tax needs to be deducted.
Employees who are paid commissions and who claim expenses can fill out Form TD1X, Statement of Commission Income and Expenses for Payroll Tax Deductions in addition to the TD1 form. They’ll need to estimate their income and expenses using either their previous year’s figures, if they were paid by commission in that year or the current year’s estimated figures. Employees can submit a TD1X form when there has been a change in circumstances or annually prior to Jan. 31.
You’ll need to file a T4 information return and then give T4 slips to each employee before the last day of February following the calendar year to which the information slips apply.
If an employee reports to your business located in Québec or you pay an employee from your business in Québec, you’ll need to meet a number of requirements unique to that province. As an example, Revenu Québec collects its own Québec Pension Plan (QPP) contributions, income tax, and Québec Parental Insurance Plan (QPIP) premiums. There are also amounts that employers need to contribute to the Québec Health Services Fund (QHSF), Commission des normes, de l’équité, de la santé et de la sécurité du travail (CNESST) and the Workforce Skills Development and Recognition Fund (WSDRF).
Employers that fail to deduct the required CPP contributions or EI premiums from the amount employees are paid are responsible for these amounts even if they can’t recover them from the employee. Employers are also at risk of a penalty of 10% of the amount of CPP, EI, and income tax that was not deducted. If this happens more than once in a year, the CRA will apply a 20% penalty if the mistake was made knowingly or under circumstances of negligence.
Employers can also face other penalties if they deducted the amounts but failed to send them to the CRA or sent them late. The penalty can range from 3%-10% of the amount due.
Employers need to prepare a Record of Employment (ROE) when an employee goes on leave or is terminated. An ROE reports the employee’s insurable earnings prior to the interruption in earnings and advises Service Canada of the reason for separation.
Meeting your obligations and responsibilities as an employer in Canada is essential to the health of your business. Find out how Powerpay’s payroll experts can help you manage your payroll from start to finish.