As your business starts to grow, you might stretch yourself thin trying to accomplish everything that needs to get done in a day. There comes a point in a business where you, as the business owner, need to grow their business. But, without extra hands on deck, your business is likely to plateau.
You need to hire an employee or two. This is a big milestone for entrepreneurs. There’s not only the realization that your business really is flourishing, but yet another learning curve to tackle: payroll.
This guide will take you through all the ins and outs of payroll and the best payroll systems for small businesses.
How does payroll work?
Payroll is a regular process by which businesses pay their employees an hourly or yearly salary for work performed. Depending on the employee type and pay structure, the employer will deduct certain amounts from the employee’s pay cheque for benefits such as Canadian Pension Plan (CPP), Employment Insurance (EI), group benefits, and so on.
We’ll discuss the steps to take, from pre-payroll to post-payroll, below.
What is the payroll process?
The payroll process isn’t just cutting cheques to your employees. It starts even before you hire your first employee.
Pre-payroll activities
In order to start your payroll, you’ll need to complete the following:
Register your business
Even if you have no intentions of hiring an employee, registering your business either as a sole proprietorship, partnership, or corporation is always a good idea. It can open you up to all sorts of opportunities, including credits, loans, grants, and possible investors. It also helps to legitimize your business in the eyes of your suppliers and clients.
Open a payroll account with Canada Revenue Agency (CRA)
In order to remit the deductions you’ve made on your employees’ pay cheques, you need to open a payroll account with CRA. This requires you to register your business and have a business number (BN). If you’re already registered for GST/HST, this is the same thing.
Actual payroll process
Here are the steps involved in the actual payroll process for businesses:
Collect the required information from your employees
Collect all pertinent information needed to complete payroll as part of your hiring process. This includes:
- Social insurance number (SIN)
- Name exactly as it appears on the SIN card
- Contact details
- Federal and provincial Form TD1.
This form determines how much tax is to be deducted from your employee’s income.
Make payroll deductions
Before you make deductions, make sure you have added any taxable benefits to your employee’s pay. These include any possible expenses like meals, memberships, parking, transportation, etc. In addition, deduct the following:
- Federal income tax: there are provincial/territorial and federal taxes to deduct. Use CRA’s online calculator to determine how much you need to deduct.
- CPP contributions: For employees between the ages of 18 and 69, are not disabled and/or are not currently receiving a CPP pension, you need to deduct their CPP contributions. Contribution rates, maximums, exemptions, and other information are on CRA’s Canada Pension Plan (CPP)
- Employment insurance premiums: Unlike CPP, there is no age limit to EI premium deductions. When your employee reaches the maximum yearly deductible, regardless of when in the year that is, you stop deducting EI premiums. You can find CRA’s chart of EI premium rates and deductibles online. It’s best you check back to make sure you’re making the appropriate deductions once a year.
Remit payroll deductions to the CRA
There are two ways to remit your payroll deductions: online via your online CRA payroll account or paper remittance via mail. The latter means you’ll also get your statements of account in the mail. Regardless of your remittance method, all of your transactions will be available via your online My Business Account.
Post-payroll process
The post-payroll process includes the yearly completion of T4 slips for each employee (both salaried employees and hourly employees) and a completed T4 summary form for the CRA for tax purposes. You must file the T4 information return and distribute the T4 slips to each of your employees on or before the last day of February following the calendar year to which the T4 slip applies.
CRA has streamlined this process and businesses can now fill out their T4 slips electronically. You can also file your T4 summary form electronically or by mail.
Why is the payroll system necessary?
Sometimes payroll can be like an arduous process filled with forms and calculations, when all you want to do is pay your employees and carry on with your business activities. But the payroll process is an important process for small businesses with employees.
1. Employee morale
Obviously, paying your employees properly is not just good business, it’s the law. But beyond that, taking your employees’ pay seriously shows your employees that you care about them, their wellbeing, and want to compensate them for a job well done. Beyond your legal requirements, it’s an appropriate gesture that shows your employees that you are a legitimate employer and you take them seriously.
2. Proper compensation
As a business owner, you want to make sure your employees are compensated appropriately. Not doing so can ruin morale and, in some cases, can be against the law. A job well done deserves to be paid appropriately. With a proper payroll system, your employees can always be sure they are paid correctly and on time.
3. Reputation
Not only is paying your employees important, it’s also important for your business’s reputation. If you don’t have a proper payroll system, you can unknowingly make mistakes or miss a payday.
4. Government reporting
Reporting to the government (CRA) is the law. If you are paying your employees, you need to be deducting CPP and EI, which must be remitted to CRA. Not doing so can incur some hefty fines, or even criminal charges. No one wants that.
5. Following labour laws
Labour laws are there for a reason: to protect both employers and employees, ensuring everyone meets their share of the employment contract.
While payroll reporting falls under federal jurisdiction, labour laws are under the purview of provincial governments. Each legislation sets out appropriate compensation, hours of work, breaks, and so on. In Ontario, the Employment Standards Act, 2000 applies. In British Columbia, it’s known as the Employment Standards Act, 1996, and in Alberta, it’s the Employment Standards Code, 2000.
6. Paying taxes
In order to properly file and pay your business taxes, you need to ensure that you’re reporting income and expenses correctly. This includes all employee salaries. As an employer, you may also be eligible for taxable benefits.
Under COVID-19 restrictions, many small businesses are also eligible for wage subsidization.
How much do payroll software solutions cost?
Payroll is essential for every employer, but for many small business owners, it’s a laborious task that can take away from other aspects of running a business. With COVID-19 restrictions now lifting, many businesses are looking to hire staff. But how much do payroll solutions in Canada cost?
Payroll software solutions can range in price from as little as $15 per month and up, depending on what you are looking for and how many employees you have. Generally, the more employees you have, the more the payroll solution will cost. But there are also free resources, usually catered to small businesses with simple payroll needs.
How do you determine the best payroll system for your business?
While many payroll solutions have similar features, payroll systems aren’t one size fits all. Just as every business is unique, each payroll system offers something a little different. And there are a lot of payroll systems out there. It can be overwhelming when first starting out. Here are a few payroll services to consider when trying to find the best payroll system for your business:
- What features are offered?: Many payroll solutions are available in a free or basic package, but these packages will generally run on the trim end and features will be sparse. For some business owners, this is just fine. For others, not so much.
- User-friendliness: The last thing you want to do is spend hours trying to learn a new system. This defeats the purpose of a payroll solution. Look for a payroll system that is user-friendly with customer support for when you have questions.
- Price: If you only have a small handful of employees, you don’t want to be spending hundreds of dollars a month on a payroll solution. The price of a payroll system should be a reflection of how many employees you have. The fewer employees you have, the less you want to spend. Also, look at hidden costs, such as a per employee fee.
- Employee benefits management: If you offer benefits to your employees, such as life insurance, RRSP contributions, and health and dental benefits, you want to make sure that your payroll solution can manage that.
What are some inexpensive payroll options?
If you’re just getting started, an inexpensive (or free) payroll service might be a good place to start. Some popular payroll services are:
- Intuit Quickbooks: Quickbooks payroll services allow you to track time, file taxes, include payroll forms, have an employee portal, and more. The fee is $20 per month plus $3 per employee, so it offers some flexibility.
- Wave Payroll: Like Quickbooks, Wave is accounting software that can allow you to process your payroll as well. It offers tax filing with federal tax forms and tax payment reporting, integrated employee portal, time management, and appropriate forms. It starts at $20 per month plus $6 per active employee.
- ADP Workforce Canada: ADP Workforce is similar to other solutions in that it offers a web-based payroll system with a single database to track all data, including hours, benefits, pay structures, and onboarding information. ADP offers the first two months for free, but is more catered to larger businesses with more employees. You’ll need to contact ADP directly for a quote.
Whatever payroll system you choose, try to find one with a free trial period to make sure it’s right for your business needs. Many payroll systems work on a per month fee structure, so if it doesn’t work for you, you have the option of switching without incurring additional costs.
Final thoughts
Taking the next step with your business and hiring employees is an exciting milestone in any entrepreneur’s career. That’s why it’s important to have all the tools you need. Investing in a payroll system means you can ensure processing payroll is simple and your employees get paid properly and on time.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.