Whether you're employing one or 50 employees, understanding the concept of payroll can be a difficult thing for small business owners to wrap their heads around.
After all, there are customers to keep happy, staff to manage and projects to finish. And as an entrepreneur, all you really want is a good night's sleep.
Making sure that payroll goes through each and every month is a moral and financial duty for any employer. However, the process is not as simple as making a bank transfer. Navigating the associated Canada Revenue Agency (CRA) paperwork alone can be a huge cause of stress for a small business employer.
For instance, failing to pay CRA remittances on time can result in automatic penalties ranging from 3 per cent to 10 per cent of interest owed, based on how late the remittance was in calendar days (one to seven or more days). Late payment for a second time, if the result of negligence, can result in a whopping 20-per-cent penalty.
So what are the five crucial topics small-business owners need to understand to effectively manage and streamline their payroll process?
1. Understand what is taxable and what isn't. Nearly everything an employee receives from an employer is considered taxable income. These benefits might include expenses, an allowance, or the use of property, such as a car, laptop, or phone.
The value of these employee benefits is based on the out-of-pocket expense an employee would normally incur. Once an employer determines the fair market value, the item can then be included in payroll. An additional calculation may have to be added to account for the GST/HST and PST, which is why this Benefits Chart comes in handy, including all CPP, EI deductions and T4 codes.
2. Maintain accurate and current employee records. Keeping up-to-date records helps those individuals in the company responsible for processing payroll quickly deal with CRA regulations. When submitting employee T4s for instance, an employer is required to have current SIN numbers and up to date addresses for all employees. When processing Records of Employment (ROEs), accurate information is vital for this process to be as hassle-free as possible. It can also help small business employers avoid the automatic penalties that accompany missing the remittance due date. One overlooked piece of data can easily result in a fine.
3. Stay on top of employee regulations and standards. Each province and territory has its own labour standards, with overall guidance coming from the CRA. Benefits and additional payments, such as overtime, the calculation of a daily wage during a statutory holiday, and the amount of vacation time to which an employee is legally entitled, all vary depending on provincial labour standards.
4. Understand the difference between an employee and an independent contractor. Whether someone is an employee of the business, or a contractor – an independent business in their own right working on behalf of the business – can make a big difference to the CRA. For instance, an employee has employment insurance (EI) rights, and an employer must pay income tax and CPP contributions. For most contractors, however, the small business employer has none of those responsibilities.
How someone is classified comes down to whether they are in a 'contract of service' (employer-employee relationship) or a 'contract for services' (business relationship). The CRA can examine the relationship and issue a ruling if there is any doubt.
5. Stay on top of year end reporting. Year-end reporting is time sensitive and the payroll department should be aware of the dates required to file reports. A T4 summary along with copies of all the individual T4s must be sent to the CRA, and individual T4s must be distributed to each employee. These T4 forms must be delivered no later than Feb. 28 of each year. One of the biggest challenges for an employer is filling out the T4 correctly. Errors are costly.
Sounds like too much information to handle? Understanding the intricacies of the payroll process is indeed complex and simply too overwhelming for most small business owners. That's why most companies prefer to outsource the payroll function.
However, just for your own peace of mind, it's important to be familiar with the key concepts in order to ensure your outsourced payroll provider is on top of all these details and handling this important function properly. Because at the end of the day, they are responsible for your pay cheque too.
Shrad Rao is the co-founder & CEO of Wagepoint, an online payroll software for small businesses. He's known for his unconventional leadership style and his desire to help Wagepoint's customers succeed. To learn more about Wagepoint, visit www.wagepoint.com.