Setting up payroll: How to get it right the first time

Once you have employees, setting up a reliable payroll system will be a key priority for your business.

The consequences of poor payroll set-up are unhappy employees, upset suppliers, and bothersome inquiries from the Canada Revenue Agency – with perhaps interest and penalties levied on overdue remittances.

Not to mention valuable time lost when you’ve got so many other important things to do in your business.

Here’s what we’ll cover

Why do payroll in-house?

Some small business owners might choose the option of setting up payroll in-house for cost reasons and flexibility.

Other reasons for running payroll in-house are:

• More control of your finances
• You can catch payroll errors quickly
• Enhanced security and protection from data breaches
• Integration with your other business systems, such as your accounting software.

James Dunworth, co-founder and chairman of E-Cigarette Direct, explains why his company has kept payroll management in-house.

“We handle payroll in-house, as it enables us to achieve cost savings, control and flexibility,” he says.

“With an in-house account team, running payroll itself does not take much time – the majority of the work is in the preparation that goes into getting payroll ready, such as calculating hours, absences, and bonus for a mixture of salaried and hourly paid staff.”

“As the actual processing of payroll is the quickest part of the process, it makes little sense to outsource this,” adds Dunworth.

“With a team of over 90 people, there are inevitably late submissions, changes and errors, and Sage Payroll allows us to make last-minute adjustments to payroll, which could provide awkward with an external provider.”

Why outsource your payroll

If you don’t have enough time to run your payroll, you could outsource it to an accountant, bookkeeper, or payroll service.

This is exactly what Marcus Franck, co-founder of heat pump specialist Smart Renewable Heat, did with his business.

“Payroll can be incredibly time-consuming, and even more so if it’s not your specialist area of expertise,” warns Franck.

“As the leader of a startup or small or medium-sized enterprise, you only have a certain amount of bandwidth,” he says. “At this critical stage of business growth, entrepreneurs and their teams need to focus on customer acquisition and retention.”

Franck believes that by outsourcing payroll to an accredited professional, business leaders can remove a major administrative headache. Otherwise, it’s up to you to figure out your employer payroll responsibilities, which can be complicated.

“By taking this off your desk, you can focus on the business-critical actions that affect long-term success,” he states. “You should also seek to partner with a provider that can make any collaboration and record-keeping as easy as possible using smart cloud software.”

A payroll specialist will also know how to enter payroll data correctly so there are no mistakes, be up on the latest rules affecting employers, and be responsible for filing your employer remittances on time with the government.

How to choose the right payroll solution

You’ll first want to consider how much help you need with your payroll system and whether you’re going to use an accountant, bookkeeper, or payroll service.

Even if you outsource, you’ll still be responsible for collecting and keeping secure records of your employee information.

Some payroll companies will do it all for you – for example, keeping employee records, providing payslips, and filing remittances to the CRA.

On the other hand, if you opt to manage your processes using payroll software, check your software provider can make sending submissions to CRA easier, offer online payslips to your employees, and provide support when you need it.

Setting up payroll for your business

If you decide to get a payroll solution for your business, it will help you to:

• Record your employee information
• Work out your various payroll tax deductions
• Report payroll information to the government
• Calculate and prepare government remittances
• Identify any statutory pay requirements, like overtime.

According to the Canada Revenue Agency, here’s a list of things you need to do if you are setting up payroll in-house:

1. Find out if you need to make payroll deductions. Check out the requirements for employers, trustees, and payers.

2. Set up a new employee. Get your employee’s Social Insurance Number (SIN) and completed Form TD1 (known as Personal Tax Credits Return) so you know how much tax to deduct before you start paying an employee.

3. Open a payroll program account. Take a few minutes to register for an employer payroll account and get your payroll number.

4. Calculate deductions and contributions. Your payroll software will make calculations for Canada Pension Plan contributions, Employment Insurance and income tax deductions from employee pay.

5. Remit source deductions. It’s important to understand when and how to send CPP contributions, EI and income tax deductions, report a nil remittance, correct a remittance, and confirm receipt of payment.

6. Send your payroll information returns. You must complete and file a year-end summary of all employee’s pay and deductions.

Understanding your employer responsibilities

The basic responsibilities of an employer in Canada are:

• Make appropriate deductions from employee payments.
• Remit these deductions, plus your employer contribution, to the Canada Revenue Agency.
• Report these amounts on the information return.

Your payroll tax responsibilities include deducting from employee paycheques the appropriate federal income tax, provincial and territorial income tax, Canada Pension Plan (CPP) contribution and Employment Insurance (EI) premium.

As an employer, you must pay an amount beyond the employee’s contribution to CPP and EI – for example, for CPP the employer matches the amount deducted from the paycheque, while for EI the employer must contribute 1.4 times the amount paid by the employee.

You may also have to pay your employee on statutory holidays, cover agreed travel or business expenses, pay a Health Tax (depending on your province or territory), or contribute to an employee pension plan.

Search online for ‘employment standards’ in your province or territory. Take time to fully understand your legal requirements for things like minimum wage, statutory holidays, vacation, leaves, notice of termination, severance pay and more.

You must also ensure compliance with workplace health and safety rules in your region. These rules are usually available on government websites for your province or territory.

Four payroll points to remember

Keep your payroll system running smoothly with these tips.

1. Follow minimum wage guidelines

While the minimum wage rate in Canada is currently $15 per hour (as of December 29, 2021) and is applicable to workers in federally-regulated industries, the minimum wage your business pays may be based on the province or territory where your employee works.

According to the Retail Council of Canada website, here’s a current list of minimum wage rates for all provinces and territories.

2. Know your employee status

In today’s modern work world, your business may operate using a mix of employees and subcontractors brought into to handle overflow work and special projects.

The CRA is very interested to know who is an employee, and who is an independent contractor.  It’s crucial to understand the differences or it could cost you dearly.

Employment status affects your worker’s entitlement to Employment Insurance (EI) benefits. It can also impact how a worker is treated under the Canada Pension Plan (CPP) and the Income Tax Act.

If a worker is an employee, you’re considered the employer and responsible for deducting CPP, EI, and income tax from their pay. You’ll also have to top up their contributions to CPP and EI as mentioned earlier.

If a worker is self-employed, they must operate a business and be engaged in a business relationship with your company. There are certain criteria required to satisfy the government’s definition of a self-employed individual.

3. Keep good records

Payroll administration can be tricky because so many parties are involved.

The employee wants to be paid accurately and on time – and understand why certain amounts are being deducted from their pay.

The government wants to make sure it collects its share of employee payroll deductions and employer contributions.

And you, as the employer, don’t want to overpay employees, incur late filing charges from the government, or lose track of HR expenses that could be claimed on your business income tax return.

Reliable, cloud-based Sage Payroll can help you to manage your payroll with confidence.

4. Keep track of payment deadlines

Finally, don’t miss deadlines to remit your payroll deductions to the Canada Revenue Agency – otherwise you may incur interest charges and penalties.

Payments may be submitted:

• Weekly on the 3^rd working day after the 7^th, 14^th, 21^st and last day of the month
• Semimonthly on the 25^th day of the same month and 10^th day of the following month
• Monthly on the 15^th day of the following month
• Quarterly on the 15^th day of January, April, July, and October

The CRA has additional information on remittance due dates including examples and remitter types.

Final thoughts on setting up payroll

Whether you are planning to manage payroll in-house or intend to outsource those duties to a payroll specialist, as you’ve read in this article there are a number of processes to go through and important things to know.

Along the way, be sure to ask questions from your accounting professional or contact the CRA for assistance.

Choosing the right payroll software solution can go a long way to help simplify the payroll burden while freeing you up to manage other essential functions in your business.