How to Set Up Payroll for a New Business
A new incorporated business in Canada is required to register and set themselves up for payroll. Even if you have only one or two employees, payroll is required to run a legal, organized, and successful company.
Payroll is considered anything you provide an employee excluding money, such as shelter, a company car, a loan, etc. If employee pay includes taxable benefits, they have to be added in each pay period before payroll deductions are made. This is because total income determines your required deductions. Please note all taxable benefits may be subject to CPP, EI premiums, and income tax deductions. It’s like any other income.
You can either set up payroll manually, which will require a lot of coordination and meticulous precision. Similarly, you can use payroll software to simplify the processes for your business. For more details, here’s how to set up payroll for a new business:
1. Set up a payroll account
To set up payroll for a new business, you must open a CRA payroll deductions program account. A business number is required for this.
Once you have a business number, you can use the CRA Business Registration Online service. This will help you distribute GST/HST, corporation taxes, import-export fees, and of course payroll.
2. Collect employee information
To set up payroll, one must have every employee’s social insurance number as well as having completed the appropriate federal and provincial forms and tax credits return. These forms calculate how much taxes are to be deduced from employee income.
Many new businesses use payroll software to automate reports and processes. A payroll system administered through software minimizes human errors and documents everything in an easily organized program. The software can track hours, calculate wages, withhold taxes and other deductions, print and deliver checks or payments, and schedule payments to government.
3. Calculate income tax deductions
There are three government program deductions that have to come from employee pay – income tax, CPP, and EI premiums. Income tax deductions are calculated based off the CRA Payroll Deductions Online Calculator. This is the easiest to find out what’s expected from your payroll.
If an employee is over the age of 18 and younger than 70 years of age, you will need to administrate CPP deductions on their pay. One can examine precise CPP contribution rates, maximums, and exemptions on the official Canada Pension Plan page.
Lastly, you are expected to deduct EI premiums in your payroll up to the yearly maximum on insurable earnings. An employer’s EI contribution is 1.4 times the EI premium withheld for the employee. There is no age limit on EI premiums, unlike CPP. That said, once you reach the maximum for the year, you are not required to continue paying into it.
4. Distribute & document payroll
You have several time period options to pay employees by. You must select one. The most common time period to do this is biweekly. You can also choose to pay employees weekly, semi-monthly, or monthly.
By law, you are required to keep all business and payroll records at your place of business or residence in Canada unless you’ve been given permission to do different. All records and documentation related to your tax obligations and entitlements are expected to be kept for up to six years.
5. Submit payroll deductions
If you are a new Canadian employee, you will not yet have a remittance form. Your first payment should be made through cheque or money order to your local tax center. Ensure it is payable to the Receiver General with your business number on the back.
Included with your payment should be a letter explaining you are a new remitter, the period your payment covers, and your business name, address, phone number, and BN.
Once the CRA has received your first remittance, you will be expected to continue submitting remittances on the 15th day of the month following the month the deductions were made. Following some remittance history, your business may be reclassified to allow you to make quarterly remittances which for most corporations is a lot more advantageous.
6. Do taxes
Come to the end of the year, you are required to submit a T4 slip and T4 Summary form for every employee. This is required to be completed, with the T4 slips handed out to employees, on or before the last day of February in the new calendar year.
Over the course of the year or after it’s ended, you may notice you’ve underpaid or overpaid on payroll. If you have underpaid, remit the missing amount as soon as possible. The CRA can choose to apply a late remitting penalty and interest on it. If you have overpaid, reduce your remittance the following year by the amount of the over-remittance. You can request a transfer or refund of the credit online or by mail as well, if preferred.
