Think back when you were working for another company before you started your own business. You were probably paid twice every month, received a pay stub for each pay period, paid a net amount after payroll deductions, and received a T4 slip by February of each year. Now that you are a business owner, you are obligated to do the same for your employees.
As an employer, there are many payroll responsibilities you need to comply. You need to calculate and deduct payroll taxes, pay employee the net amount after payroll deduction, issue pay stub for each pay period, remit payroll deductions according to your company’s remittance frequency, and file and issue T4 by end of February of the following year. We will explore each section in detail so that you are fully aware of your payroll obligations.
Calculate and deduct
Unless you are in Quebec, there are 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 5.10% of the employee’s pensionable earnings up to a maximum of $57,400 for the year of 2019. 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 1.62% of the employee’s insurable earnings up to a maximum of $53,100 for the year of 2019. 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 would calculate withholding tax based on the information provided on Federal and Provincial Forms TD1 that were 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, you can remit the net amount to the employee.
You can write a cheque for the net amount, but it is more efficient to set up direct deposit for your employees. To do this, you should ask for a copy of the employee’s void cheque when the employee was hired and allow sufficient time to set up the employee for direct deposit.
For direct deposit to work effectively, you must take into consideration of the lead time required process payroll to ensure your employees get paid on the payday.
Issue pay stub
As an employer, you are required by law to issue a pay stub for each pay period. You can provide a physical copy of the pay stub along with the net amount paid to the employee. Better yet, you can issue online pay stubs. You will need to set up a personal account for each employee first so that you can post online pay stub in each respective employee account where they can access it at their convenience.
Remit payroll deductions
After you have collected payroll deductions from the employees and determine the employer’s portion of the CPP and EI, your business is required to remit payroll deductions to the CRA by the remittance due date. How frequent you need to remit will depend on your company’s average monthly withholding amount. There are 4 remitter types and we will explore each in detail.
Quarterly Remitter remits payroll deductions 15 days after each calendar quarter. For example, payroll taxes deducted between the months of January to March must be remitted to the CRA by April 15. Your business is qualified as a Quarterly Remitter if it is a new business with average monthly withholding amount of less than $1,000 and a perfect compliance history for payroll and GST/HST.
Regular Remitter remits payroll deductions monthly by the 15th of following month. For example, payroll taxes deducted in the month of January must be remitted to the CRA by February 15. Most businesses in Canada fall under this remittance type and remit payroll deductions on a monthly basis because the threshold for average monthly withholding amount increases to $25,000.
Threshold 1 Accelerated Remitter
Threshold 1 Accelerated Remitter remits payroll deductions twice a month. It is intended for medium to large organizations as the threshold for average monthly withholding amount is between $25,000 to $100,000.
Threshold 2 Accelerated Remitter
Threshold 2 Accelerated Remitter remits payroll deductions four times a month. It is intended for large organizations as the threshold for average monthly withholding amount is above $100,000.
File and issue T4
Payroll filing and obligations follow the calendar year regardless of your company’s fiscal year. Your business must file a T4 return with the CRA by the end of February of the following calendar year to report the payroll earnings for all employees who were paid during the year. These include regular pay, overtime, bonus, vacation pay, statutory pay, and other taxable benefits. To ensure T4 reporting is correct, your company’s payroll records must be updated in the accounting system after each pay period and each payroll remittance. An accurate and up to date payroll records is the best defense against a payroll audit.
Your company also needs to issue a T4 slip to each employee by the end of February of the following calendar year. T4 slip must also be issued to employees who left your company during the middle of the year.
What if you fail to comply with the CRA?
If you do not fulfill your obligations and comply with the payroll requirements, your business may be assessed a penalty and interest.
Failure to deduct
You are responsible for all payroll withholdings if you did not or forget to withhold payroll deductions from your employees. The penalty is 10% of the amount you did not withhold and could increase to 20% for repeat offender.
Failure to remit
You may be assessed a penalty if you are late or fail to remit payroll withholdings. The penalty is calculated as follows:
- 3% if the amount is three days late
- 5% if it is five days late
- 7% if it is seven days late
- 10% if it is more than seven days late, or if no amount is remitted
The penalty could increase to 20% for repeat offender.
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 and could go up to $7,500. You may be assessed a penalty as well if the T4 slips are not issued on time.