Payroll is an inevitable part of running a successful business. If you are not familiar with payroll, you may not realize how intricate it is.
From the inception of setting up the system to on-going maintenance, everything must be arranged in a manner. This ensures correct payments are made to your employees and to avoid unwarranted penalties that may be imposed by the Canadian Revenue Agency.
If you are not cognizant of your payroll obligations, your business could be held financially liable.
Here are 7 payroll mistakes that could put your company at risk.
Calculation error
If an error is made in calculating payroll deductions and you deducted less than the appropriate amount, you are responsible for these amounts even if you cannot recover them from the employee.
For example, if you deducted a total of $350 from the employee’s pay cheque when you are supposed to deduct $500, you will be liable for the difference of $150. You can arrange your employee to recover this amount, but if you are unable to, your business will still be liable for the difference.
Failure to deduct
A failure to deduct often occurs when you are new to payroll and you are not aware of your obligation to deduct payroll taxes.
One of the first penalties that may be levied against you as an employer is the failure to make deductions on Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income taxes.
An initial 10% penalty will be imposed on any deductions that are not made, and the penalty may increase to 20% if the same mistake is repeated within the same calendar year. Also, the CRA may enforce the increased penalty if the mistake is made knowingly or under gross negligence.
Failure to remit
Businesses without a good payroll system may forget to remit payroll deductions to the CRA by the due date as payroll remittances are generally required to be done on a monthly basis.
The penalty for failure to remit may vary depending on the circumstances. The penalty is 3% if it is three days late, 5% if it is five days late, 7% if it is seven days late, and 10% if it is more than seven days late. The CRA may increase the penalty to 20% if the same mistake is repeated within the same calendar year.
Payroll remittance due dates can vary depending on the company’s remitter type, read The Ultimate Guide to Implement Payroll to learn more about the different remitter types and the respective remittance due dates.
Failure to file T4
A business may find itself struggling to file an accurate T4 return with the CRA if it does not maintain proper payroll records.
T4 return must be filed with the CRA and T4 slips must be issued to each employee by the end of February of the following year.
The penalty for failure to file a T4 could go up to $7,500, which is determined based on the number of days late and the number of T4 slips not filed by the due date.
Failure to maintain proper payroll records
Payroll processing is not complete until payroll journals are properly recorded in the accounting system.
While there are no immediate consequences for failure to record payroll journals, your business may be at risk of potential payroll audits in the future. The numbers reported on the T4 must reconcile with the internal payroll records and the CRA records. If there is a difference, the CRA will adjust the T4 return and may consider conducting a payroll audit on the business to further investigate the discrepancy.
The best defense is to maintain proper payroll records for each pay period and after each payroll remittance. These payroll journals pay include but are not limited to:
- Employee’s payroll deductions
- Employer’s payroll deductions
- Employee’s net pay
- Payroll remittance to CRA
Failure to retain completed TD1 forms
When a new employee begins work at your company, they are required to complete a Personal Tax Credits Return, commonly known as a TD1 Form, to set up the employee on the company’s payroll system. The maximum penalty for failure to retain completed TD1 form is $2,500.
You will also need the completed TD1 forms to accurately calculate the income taxes to be withheld from the employee on each pay cheque.
Failure to file ROE
What happens when an employee leaves the company? As an employer, you must file a Record of Employment (ROE) with Service Canada to provide details on their employment history. The employee will use it to apply for benefits that are covered under employment insurance. Failure to do so may result in a non-compliance penalty.