If you are a Canadian business owner, understanding how to run payroll in Canada is an essential part of ensuring your employees' pay is accurate and timely.
An accurate and timely payment of salary is important. However, the question of how to run payroll is not completely answered without adherence to various laws and regulations guiding the process.
Failure to adhere to these laws and legislations can lead to serious legal and financial consequences for your business.
To keep your employees happy and your business floating while making sure you are also law compliant, you must understand what payroll is and the basics of how to run payroll efficiently. Also, there are various methods of running payroll as a business owner in Canada. So, in this article, we will explain some of these methods on how to run payroll in Canada.
What is payroll?
Payroll means a business paying its employees. It is the sum of all compensations a business must pay its employees for a set period or on a given date. For a small business, this may entail distributing money in the form of paychecks or direct deposits to employees' accounts.
For larger firms, the process tends to be more cumbersome. It generally includes tracking hours worked, calculating each employee's pay, bonuses, taxes, overtime pay, sick time, vacation pay, and the final payment distribution.
Payroll may also refer to the list of business employees and the amount paid to each as wages, compensation, or salary. It gives an index of the total workforce and the cost of that workforce.
No matter the size of your business, payroll is usually a major expense, and as such, it is almost always deductible from the business gross income. This lowers your final taxable income when final taxes are computed for your business.
How do I set up my payroll in Canada?
Setting up payroll for a new or growing business is very vital. The following are some easy steps to help you on how to run payroll in Canada:
Registration with government agencies
To run a payroll in Canada, you must have a valid Business Number (BN). It can be obtained from the Canada Revenue Agency (CRA). A business number identifies your business with the federal government.
It also lets you remit statutory deductions such as income tax, Canada pension plan, and employment insurance. Upon registration for a business number, you can then request a payroll account. If you have a BN already, you can just add a payroll account from the CRA website.
Another important registration you must do is that of the Workplace Safety and Insurance Board (WSIB). This depends on your province.
If your business is located in Ontario, you must register with the board within ten days of hiring your first employee. You also have to register with the Ontario Ministry of Finance for health tax remittance.
Collection of employee information.
To run payroll efficiently, you'll need some information from your employees. These are basic details and generally include the following:
- Phone number
- Date of birth
- Date of employment
- Social Insurance Number (SIN)
- Amounts to be paid.
- Type of payment, i.e., salary or hourly
- Accruals (bonuses, vacation)
- Bank account details for direct deposit
Computation of wages and tax deductions.
An employee's gross wages are the amount you pay to each employee before any deduction, such as taxes and retirement contributions. This can be expressed per hour, per period, or year.
You will also have to include taxable benefits in the calculation of gross wages. A taxable benefit is anything your business provides for employees on top of their wages. It may include a car, parking cost, lodging, cell phone, etc.
As a small business owner, you are also responsible for remitting a portion of employee wages as taxes and contributions to the appropriate bodies. Various deductions on the CRA payroll include; federal income tax, provincial or territorial income tax, Canada Pension Program (CPP), Employment Insurance (EI) premiums, Registered Retirement Savings Plan (RRSP) contributions.
Payroll reconciliation and issuing of paychecks.
Payroll reconciliation helps you balance your current payroll to the payroll recorded in your general ledger. It helps eliminate payroll errors before they occur. This ensures that your employees' payments are as accurate as possible.
After clearing up any error, you can send out employee's paychecks directly or through payroll software.
Push offers an example of good payroll software. It is a fully integrated and cloud-based payroll software that makes it easy for you to stay on top of every aspect of your payroll. It saves you time with smart automation, calculations, and data transfers.
How often do I run payroll?
One of the most asked questions apart from how to run payroll is how often it should be done. To determine how often you will pay your employees, you must consider the nature of your business and your cash flow cycle.
However, it would be best to keep a consistent schedule as employees will not be happy with a haphazard scheme of payment. Various scheduling options you may consider when deciding how often to run payroll include:
- Weekly: This is ideal if you run a very small business with hourly wage workers.
- Biweekly: This is the most used payment schedule. It is easier to use and manage irrespective of your business's size or the payment type you have adopted (hourly or salary). Workers receive their pay every two weeks and on the same day of the week every time. This is usually every second Friday. A downside is that some months can have three paydays, and this may affect cash flow.
- Semi-monthly: Here, your employees get their pay on the 15th and the last day of every month. This method works best for salaried workers, and it is not ideal for hourly workers as it is difficult to keep track of work hours included in a particular pay period. However, an advantage for you as the business owner is that there are only two pay periods each month. This makes your cash flow more predictable and allows for a comparison of monthly financial details.
- Monthly: It is a rare payment schedule. It is good for you if most of your workers work on a commission basis.
Should I run payroll myself, use payroll software, or something else?
No one answer fits all situation on how to run payroll. You can decide to run your payroll manually, use payroll software or outsource to professional payroll service providers. Again, you have to consider the nature, size of your business, and the technical knowledge required.
The manual method makes use of ledgers and cheques or e-transfer. This is usually prone to mistakes and errors in processing payroll as you must calculate all the reductions and remittances by yourself.
This can be annoying for both you and your employees when mistakes occur. Employees are not paid accurately while you, as the business owner, may face stiff penalties from CRA when such mistakes happen. So, unless you are skilled enough and the business is just small, it is better to use payroll software.
Payroll software offers automatic calculations and remittance of all necessary payroll deductions. You can also pay employees via direct deposits. You just have to input wages and hours worked, and the software uses this information to perform calculations and deduct withholdings automatically.
Another advantage is that most payroll software systems are updated when there are tax laws changes and will alert you to file for certain tax reforms. An example of such a software system is Push Payroll Software. It can help you streamline hours directly into your payroll for one-click payroll processing.
Another option available to you is to have someone who already works for you and with the requisite skills to run your payroll or engage professionals' service. These professionals also help produce various reports that simplify accounting procedures and ensure your business complies with all necessary laws and taxes.
What is payroll processing, and what should I do?
Payroll processing entails everything we have discussed so far. It is the entire process from inputting employee details into your payroll manually or using software to the actual issuance of paychecks.
Since the workforce's payment is a critical part of your business, its importance cannot be understated. Here are seven things you should do to ensure a hitch-free payroll process.
- Plan and create a payroll policy: This is the first thing you must do. You must determine and establish a standard payment policy, leave, and benefits policy, attendance policy, etc. While doing this, you must consider local labor laws, provincial laws, and federal labor laws. Things to include in your pay policy include; pay dates, frequency of payment, and how you'll pay your employees- by direct deposit or via paychecks.
- Choose a convenient payroll system: There are three main payroll systems you can choose from; manual payroll, outsourced payroll, and payroll software. The pros and cons of each are already discussed. But before choosing any of these systems, you must consider factors such as business size, growth, employee benefits, expertise, and the complexity of calculations required.
- Gather necessary information: Before you begin processing payroll, you need to gather some documents which government agencies may require. These include federal and provincial TD1 forms. These documents will give you each employee's personal information, social security number, and tax filing status. If you intend to include things like health insurance and retirement savings for your workers, you'll need documents showing approved additional deductions. Finally, if you want to pay via direct deposit, you'll have to get your workers' consent and banking information.
- Set up direct deposit: The direct deposit is usually used because of its convenience for business owners and workers. You can easily set this up through your business bank or your payroll service provider. The bank or payroll software will require your employees' banking details to facilitate direct pay.
- Set up a time tracking system: if you decide to pay hourly, you will need to maintain an accurate record of work hours for your employees. You can do this manually by asking employees to sign in and out every workday. You might also use time tracking software for this purpose. At the end of each pay period, all you have to do is transfer the accumulated work hours to your pay record. If you use tracking software, just import this information to your payroll software.
- Validate and submit payroll: This is especially important if you run payroll for hourly employees. You must ensure that all hours worked are correctly computed so that each employee's pay is accurate. Once this is done and you have given approval, the final piece on how to run payroll jigsaw is in place. You can then issue payments out to each employee.
- Report and update records: After completing payroll for each month, a payroll report should be properly documented. The report should include the details of all deductions and tax contributions from each employee's wage. You should also update payroll records at intervals taking into consideration changing laws and regulations.
What are payroll deductions, payroll remittance, and payroll taxes in Canada?
Payroll deductions are withholdings removed from employees' wages for taxes and other contributions. In Canada, it is required of you as an employer to withhold source deductions such as Canada Pension Plan (CPP), Employment Insurance (EI), and income tax from employees' pay and remit them to the CRA at regular intervals.
This must be done properly because penalties are attached if remittance is not made on time or if errors are made.
The CPP and the Employment Insurance EI both have two parts. A part is deducted from the employee's pay, and the employer contributes the other part. For the income tax, it is only deducted from the employees' pay.
There is an annual maximum amount for each of these deductions, and contribution stops when the amount is reached. Besides income tax, federal and provincial taxes also have to be calculated and paid to the CRA.
Payroll remittance is usually paid monthly. The due date is usually the 15th of the following month. For example, the deductions from February will be due on or before the 15th of march. It will help if you keep an eye out for due dates not to have late payroll remittances.
How do I calculate payroll deductions, payroll remittance, and payroll taxes in Canada?
Calculating payroll remittance depends on the type of payroll system you are using; a manual payroll system or payroll software.
If you are using a software system like the Push Payroll software, the payroll deductions and remittance will be computed automatically. The software withdraws the necessary deductions from your business account and remits them to the CRA for you. This is not only efficient; it is also timesaving and requires little to no effort.
Consequently, if you handle your payroll by yourself, you'll have to make the deductions manually and send the payment to the CRA by yourself. The best way for you to do this is by using the CRA online calculator. After this calculation, you'll need to provide additional information when making payment.
These include payroll account number, pay period, period due date, number of employees, gross payroll, and remittance due date. You can find details of how to go about this on the CRA website.
How do my employees get paid?
There are three ways you can use in making payments to your employees. These are:
- Use of paychecks: This is the traditional method commonly used in the past. Although it is giving way for more tech-enabled means, it is still in use by some employers.
- Direct deposit: Electronically transfers payment from your business account to your employees' bank account. It is fast and easy to use.
- Use of pay cards: This is a more recent payment option, and it involves the use of prepaid debit cards or payroll cards.
What is a T4, and how does it relate to running a payroll?
T4 is a group of forms that summarizes employees' earnings and deductions for each year. It is usually due in February, and it contains information for the previous year. It can be done electronically or by using paper slips.
The form is to be filled by your employees and subsequently submitted to the CRA before the due date. You, as the employer, also have to fill a summary form that accounts for all employees' earnings and deductions.
Penalties are attached to late submissions and errors in filling the report. Hence, you must ensure diligence while filing it or, better still, use software or professionals to do this.
How to run payroll the easiest way.
The long hours you will spend doing all the required calculations and the steep price you'll pay for errors is why you should follow the following steps to make running your payroll easier.
- Use a unified pay period: If you decide to use the biweekly or semi-monthly schedule, stick with it across the board. Paying some workers weekly, others biweekly, and others semi-monthly will complicate your payroll.
- Use payroll software: The automated nature of payroll software saves you a lot of time and effort. It also reduces redundancy and improves compliance with all necessary regulations.
- Synchronize your payroll platform with other processes: Using the right payroll software, you can integrate your payroll with other processes such as work time tracking, report writing, and the creation of accounting ledgers.
- Monitor current regulatory requirements: this will help you avoid costly penalties and aid compliance. Tax laws and regulations regarding payroll are ever-changing, so keep your nose on the ground.
- Work with a professional: payroll service providers can handle all aspects of your payroll while focusing your time and energy on other important aspects of your business. The extra charge is worth every penny, considering the price you'll have to pay for errors and non-compliance.
Wrapping it up
As indicated in the guide, there is no one-size-fits-all approach when you are figuring out how to run payroll. Start by looking at your business size, your budget, and the number of staff your business is paying.
Do you run a small business with a small team? Figuring out how to run payroll doesn't have to be hard.
Payroll software to keep things organized, save time, and take away the headaches of running a payroll of a large team.