Have you ever worked for another company before you started your business? You probably got paid every two weeks, you were issued a pay stub, you were paid a net amount after all payroll deductions and you received a T4 slip in February of the following year. Now that you are a business owner, you need to do the same for your employees.
In this article, we will talk about what your responsibilities are after you have hired your first employee, and why payroll can be a cumbersome process that may warrant the help of a bookkeeper.
After you decide how much and how frequently you will pay your employee, you need to calculate payroll withholding for each pay period, remit payroll taxes for each remittance period, and file and issue T4s at end of February following the calendar year-end. Below, we will look at each of these topics in detail so that you are fully aware of your payroll responsibilities.
Calculate Payroll Withholding
Unless you are located in Quebec, there are generally three types of payroll withholdings you are required to calculate and deduct from your employee’s paycheque.
Canada Pension Plan (CPP)
You are required to withhold 4.95% of the employee’s pensionable earnings up to a maximum of $55,900 for the year of 2018. Pensionable earnings generally include all regular salary and wages paid to an employee. A few exceptions include workers under the age of 18, disabled individuals or workers over the age of 65. If your employee’s year-to-date salary exceeds the maximum pensionable earnings, you are no longer required to withhold the employee’s portion of CPP for the remainder of the year.
As an employer, you are responsible to pay an equal amount of your employee’s CPP contribution.
Employment Insurance (EI)
You are required to withhold 1.66% of the employee’s insurable earnings up to a maximum of $51,700 for the year of 2018. Insurable earnings generally include all regular salary and wages paid in cash to an employee. A few exceptions include benefits not paid in cash, certain disability-related employment benefits, personal or living expenses, and allowances with respect to employment in a special worksite. If your employee’s year-to-date salary exceeds the maximum insurable earnings, you are no longer required to withhold the employee’s portion of EI for the remainder of the year.
As an employer, you are responsible to pay 1.4 times the amount of your employee’s EI premium.
You calculate withholding tax based on the information provided on Form TD1 that was completed by your employee. The amount is calculated based on the personal tax credit and the marginal tax bracket of the employee, based on their projected annual salary.
Once you have calculated and withheld the appropriate amount of CPP, EI and income tax for each pay period, you remit the net amount to the employee.
Remit Payroll Tax
You may have heard that businesses remit payroll tax every month, on the 15th of the following month or on a quarterly basis. To find out when you are required to remit payroll tax, you first need to determine the remitter type of your corporation. There are four types of remitters:
- Quarterly Remitter
You are qualified as a Quarterly Remitter if you are in your first year of business and your Average Monthly Withholding Amount (AMWA) is less than $3,000. For example, if the combined payroll withholding (CPP, EI and income tax) for the previous month is $2,800, and the combined payroll withholding for the current month is $2,900, then the AMWA is $2,850. AMWA is normally calculated over the average of a one-year period.
- Regular Remitter
You are qualified as a Regular Remitter if your AMWA is less than $25,000.
- Threshold 1 Accelerated Remitter
You are qualified as a Threshold 1 Accelerated Remitter if your AMWA is from $25,000 to $99,999.99.
- Threshold 2 Accelerated Remitter
You are qualified as a Threshold 2 Accelerated Remitter if your AMWA is $100,000 or more.
Once you have determined the remitter type that is applicable to your business, below are the remittance due dates that correspond with each type of remitter.
|Remitter Type||Remitting Frequency||Remitting Period||Remittance Due Dates|
|Quarterly||Quarterly||Jan. 1 to March 31
April 1 to June 30
July 1 to Sept. 30
Oct.1 to Dec. 31
|Regular||Monthly||Calendar months||15th day of the next month|
|Threshold 1 accelerated||Up to twice a month||1st to 15th of the month
16th to end of the month
|25th day of the same month
10th day of the next month
|Threshold 2 accelerated||Up to four times a month||1st to 7th of the month
8th to 14th of the month
15th to 21st of the month
22nd to the last day of the month
|3rd working day after the 7th
3rd working day after the 14th
3rd working day after the 21st
3rd working day after the last day of the month
Most small businesses would fall under the Regular Remitter type. As an example, if the payroll withholding for the current month is $10,000, you are required to remit payroll tax by the 15th of the following month.
Prepare and File T4
Irrespective of your business fiscal year-end, payroll runs on a calendar year. T4 returns must be filed with the Canada Revenue Agency (CRA), and T4 slips must be issued to each employee by the end of February of the following calendar year.
What if you are non-compliant?
If you do not fulfill your obligations and comply with payroll requirements, you may be assessed a penalty and/or interest.
Failure to withhold
You are responsible for all payroll withholdings if you did not or forget to withhold payroll deductions from your employees. In addition, you may be assessed a penalty of 10% of the amount you did not withhold.
Failure to remit
You may be assessed a penalty if you are late or fail to remit payroll withholdings. The penalty calculations are as follows:
- 3% if the amount is one to three days late
- 5% if it is four or five days late
- 7% if it is six or seven days late
- 10% if it is more than seven days late, or if no amount is remitted
Failure to file
You may be assessed a penalty if you are late or fail to file a T4 return with the CRA. Penalty starts at $100 for corporations with one to five employees, and can go up to $7,500 for large corporations.
Payroll functions could become an administrative burden for a business owner due to the vast recurring activities discussed above. Instead of performing all payroll functions yourself, it may be wise for you to hire a bookkeeper to help you. This would give you more time to focus on what’s important to you – growing your business.