As a business owner in Canada, you have gone through the hassle of setting up your business and hiring your first few staff - but understanding how to pay your employees is a topic that every business owner could benefit from finessing.
To understand how best to pay your employees in Canada, you need to understand how much one should get paid, different compensation structures within the country, and finally, the tactical execution of distributing payment to your team.
Who runs a business without paying their employees what they are worth and accurately and as timely as possible? It could be possible somewhere else, but in Canada? Never! There is no way the Canada Revenue Agency (CRA) is letting you get away with that.
These and other reasons are why it is essential to take seriously how your employees are compensated, what form of payment to employ, and the best payroll system for your business.
Common questions that Canadian business owners ask about employee payroll include:
- How much should I pay my employees in Canada?
- What are other forms of employee compensation to Consider?
- What are the best payment methods for employees?
- What information do I need to pay my employees directly?
- How do I process employee payments?
- How often do I pay my employees?
- How do I navigate employee deductions and remittances?
In this article, we will hold you by the hands and walk you through the essential things you need to know and the steps you need to follow when it comes to paying your employees accurately and seamlessly. Whether you own a small or big business, have hired hundreds of employees before or looking out to hire your first employee, these steps will still work for you regardless. Ready! Then, let's get started already.
How much should I pay my employees in Canada?
Compensating your employees is one of the most crucial decisions you can't afford to make errors with as a small business owner in Canada.
To fully understand how much you should pay your employees, here are some factors you need to consider:
What are minimum wage obligations?
As an employer, before you can decide how much to pay your employees in Canada, you need to be well informed about minimum wages in your province or territory.
In Canada, the minimum wage set and enforced by each of the provinces is different.
If you don't already know the minimum wage in your province, you can check it out on the Canada Revenue Agency's official website.
Ontario, for example, has a minimum wage that is lower than usual for "student servers." If you don't want to incur penalty charges, underpay or overpay your employees, you need to understand how minimum wage applies to your province.
What are your employees worth in the market?
It's time to look out at other businesses in the same niche. What are other employers in the same industry paying their employees? This is one of the best ways to conclude as regards to how to pay your employees.
Although, business size may mean that you can't afford to pay what other businesses in the same niche are paying, once you know what compensation other businesses like yours are paying their employees, it becomes a lot easier for you to pay your employees what they are worth without overpaying or underpaying them.
What type of employees do you have?
The type of employees you have or need to hire for your business is also an essential factor that decides how much you should pay them.
Are your employees independent contractors, full-time or a combination of both?
Full-time employees would have more work hours than employees working as independent contractors. You might want to consider compensating your full-time workers more for their extra efforts and contributions to your business.
In most cases, business owners often work extra than every other person in the company; this could mean that you would be paying yourself more than any of your employees as your boss.
How much can you afford to pay your employees?
Your employees often have in mind what type of compensation they are expecting you to pay. Especially if they are joining your business from a similar job they've previously worked in.
What can you afford to pay without putting your business at risk? These are the questions you need to answer if you want to know what you should pay your employees.
As a startup business, you may not want to pay your employees what bigger businesses are paying. Understanding your income and profit margin should help you decide what you can afford to pay your employees.
It is difficult to say how much you should pay your employees, but the points mentioned above should guide you on the right path to paying your employees what they are worth regardless of your business type or size.
What are other forms of employee compensation to consider?
Aside from compensating your employees for work done, there are other forms of benefits and compensations you should know about as an employer. Such as creating an excellent employee benefits program.
Employee benefits programs are a crucial aspect of an employee's compensation package and, when done well, can help you keep quality employees while they also enjoy peace of mind. Who doesn't love extra money?
There are two major types of employees benefit package you should know about; legislative employee benefits and competitive employee benefits. These two forms of compensations are easy to differentiate; you can't mix them up.
- Employment insurance: employer and employee contributions are necessary
- Canada pension plan: employer and employee contributions are necessary
- Workplace insurance coverage: Workplace Safety and Insurance Board may vary depending on your industry and province.
These types of legislative benefits are mandatory for Canadian business owners to provide by law.
Competitive employee benefits:
- Health insurance, which should cover hospital care, medications, physiotherapy and other health-related issues
- Assistance programs for employees
- Long-term disability insurance. It is cost-effective if the employee pays for this as it will save the employer money. This form of compensation is not taxed, should the employee need to claim it sometime.
- Group RRSP or pension plans: This form of retirement savings plan is separate from the Canada Pension Plan and will help boost your employees' total retirement benefit.
- Education and training: Employees should be compensated for any form of exercise they acquire to improve their experience while working in your organization.
- Flexible work arrangements
- Vision care
- Dental insurance
- Extra vacation grants above required by the Ontario Employment Standards Act can be included as a form of competitive employee benefit.
- Life insurance
- Paid sick days
- Short-term disability insurance. As an employer, you should investigate the disability coverage provided under Employment Insurance and Canada Pension Plan to determine if additional coverage is needed)
Competitive benefits are nice to haves, and do attract employees to the job.
These questions are so important because if not well-planned, competitive employee benefits may be cost-prohibitive.
What are the best payment methods for employees?
There are many questions about paying your employees that don't have the same answers for every business. What payment method is convenient for your business may not be suitable for another type of business.
Your business's size, mode of operation, number of employees are some of the reasons you would want to consider before choosing a particular payment method for your employees.
Here are some standard payment methods to consider:
Amongst every payment method used by business owners in Canada, direct deposit seems to be the most widely used. There are many reasons why this payment method has become the favorite of many business owners in Canada, but convenience and ease of processing are a few you can't ignore.
Using the direct deposit payment method means that you don't have to hand over wages or compensations physically or directly to employees. This saves you a lot of time and makes keeping records of employee's payment a lot easier.
With direct deposit, you do not have to do any work as an employer. There are payroll services with direct deposit features that can help you process payments to your employees automatically when due, deduct appropriate taxes and keep records of payments made.
Cons of using direct deposit:
- Using direct deposit may mean extra charges. A payroll service can save you a lot of direct deposit charges in the long run.
In contrast to electronic payment methods like direct deposits, employees do not need to have bank accounts to receive their compensations, wages or salaries. If you run a business that does not require employees to give out their bank information, this method might be your best option.
Cons of using paychecks:
- If you have many employees, this payment method is a No! No! for you. It takes a lot of time to write checks for every member of a large business or organization.
- A paycheck can get lost or stolen. You will only be left with an unhappy set of workers whose hard work got lost because all their work's compensation was written on a piece of paper.
- You may want to consider printing out paychecks to save you a lot of time, but this will still mean extra cost as you will need to stock up printers, inks or may even need a particular MICR printer with magnetic ink.
Deciding to pay your employees cash means that you want to take out money from your business and pay each employee directly. Paying cash is one of the methods you have at your disposal, so it's good to discuss the pros and cons so you can be sure if this method should be considered an option for your business.
Cons of using cash:
- With this payment option, you will raise many brows, as tax and revenue agencies will be suspicious about your company not wanting to pay its appropriate tax.
- It is easy to make mistakes with these methods. Underpaying, overpaying due to miscalculations are a few of the easily occurring errors.
- It is time-consuming for businesses with large employees.
What information do I need, to pay my employees directly?
In order to set up and pay your employees directly, the following information is crucial:
- Their bank account number
- The bank account type (checking, savings)
- The bank's routing number
- The bank's name
- Their SSN (social security number): This needs to be collected within three days of their hire date, and if the employee doesn't have a valid Social Insurance Number (SIN), you must show that you've made reasonable efforts to obtain it.
- A TD1, Personal Tax Credits Return Form must be filed within seven days of their start date to enable CRA to determine how much provincial and federal tax should be deducted from their earnings.
Gathering information for directly paying your employees will be a lot easier if you use HR software with employee logins. Your employees can easily fill in crucial information, and it is a lot easier to be integrated with payroll processing software.
How do I process employee payments?
Before you can start sending out compensations to your employees, you need to be sure that your business is registered and you have received a valid business number from the CRA (Canada Revenue Agency).
Without a valid business number, remitting statutory payroll deductions, such as CPP, income tax and employment insurance, will be impossible.
After the validity of your business number has been ensured, you'll need to gather appropriate information from your employees to help with the payroll process. Information to request from your employees have been discussed earlier in this post; please, revisit for clarifications.
As an employer, you can decide to run the payment process yourself if you think you are experienced enough, or simply use a cloud based payroll software system.
This will allow you to set up your employees accounts via direct deposit, and keep all of their important employee information on file.
Using a payroll processing software will also automate your employee wage, overtime and stat holiday calculations - and can also provide automated government deductions and remittances.
How often should I pay my employees?
The first thing you need to have in mind when deciding how often you need to pay your employees is that your business can be fined for inaccurate tax deductions, late or nonpayment of remittances, and the wrong inputting of information returns.
So, you may want to choose the frequency of paying your employees carefully. You don't want a method that will put your business at risk or at the expense of having to pay for violations subsequently. Your specific business needs and cash flow cycle must be considered, as you will need to stick to your chosen payment frequency consistently.
The most common frequencies for employee payments in Canada are:
- Bi-weekly (every two weeks)
- Weekly and,
- Semi-monthly or monthly pay
All payment options come with their pros and cons. Understanding your type of employees and their preference for getting paid is also essential. If you have employees who live paycheck to paycheck, then adopting a monthly payment frequency may look a bit unfair to them.
For businesses with many short-term or hourly-wage workers, making payments on a weekly frequency might be a better option. In contrast, larger businesses may want to consider semi-monthly frequencies.
How do I navigate employee deductions and remittances?
To navigate employee deductions and remittances, you will need to understand the required source deductions taken from your employee's income and other employer's share of contributions and premiums.
Common payroll deductions in Canada include:
- Canadian Pension Plan (CPP) contributions
- Employment insurance (EI) premiums
- Federal, provincial or territorial income tax
- Remittance categorization and schedule
Your business' average monthly withholding amount (AMWA), or the sum of all payroll deductions paid to the CRA within a calendar year, averaged monthly, will determine your remittance schedule for payroll deductions.
To process your employees' remittance, the following Statement of Account for Current Source Deduction remittance voucher forms should be completed:
- PD7A form for regular and quarterly remitters
- PD7A(TM) form for businesses that fall under the category of accelerated remitters
Payroll deductions must be held in trust in a separate account from your standard business account.
For convenience, remittance payments can be submitted electronically, in person at your local financial institution, or by mail.
Another option when navigating payroll deduction and remittances is to use a cloud based payroll software that automates all of these calculations for you, so at the end of the year, all you have to do is simply provide your employees with their T4's and you are good to go!
We hope you found this guide helpful, for any other questions on how to pay your employees in Canada, reach out to us at Push!