Whether you’re selling hemp beauty products online or offering landscaping services to busy homeowners, you may need an employee if your business is growing. Maybe you’ve been doing it alone this whole time. Maybe you’ve been using contractors or freelancers as needed. Either way, you’re taking the plunge and making your first hire!
Now that you’re an employer, the CRA expects you to keep an accurate record of the hours your employee works, their wages, deductions and more, which you’ll need for tax purposes.
Enter payroll.
Setting up a new employee on payroll isn’t as hard as it sounds. Especially if you follow these five easy steps.
- It’s your responsibility as an employer to deduct taxes on behalf of your employee(s).
- The amount of provincial income tax you must deduct from your employee’s gross earnings varies by province.
- The CRA penalizes businesses for not collecting and remitting employee source deductions accurately and on schedule.
STEP 1: Open a payroll account with the CRA.
If you already have a business number (BN), setting up payroll is pretty straightforward.
Add a ‘payroll account’ to your existing CRA account, and you’ll be assigned a 15-character payroll program account number (that includes your nine-digit business number). The CRA will use this number to identify your business and keep track of it from a tax perspective.
If you don’t have a business number, you’ll get one automatically when you go through the process of opening a payroll program account. The Québec employer’s kit can be found here.
STEP 2: Gather Employee Information
There’s no escape, even for your employee, with payroll comes paperwork. Your new hire’s first job will be to provide you with their Social Insurance number (SIN) and complete two forms: Federal TD1 and Provincial TD1.
These forms will supply the information you need to calculate how much income tax to deduct from their earnings. No need to send this paperwork to the CRA. It’s for your records only.
In Québec, along with the Federal TD1, employees must complete the TP1015.3-V Source Deductions Return.
STEP 3: Calculate and set aside deductions for the CRA
Employee deductions
As an employer, paying your new hire comes with a twist called source deductions.
Rather than cutting your employee a cheque for their gross earnings, you must first subtract federal and provincial income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums on their behalf. The cheque they get reflects their ‘net’ earnings — aka the amount left over. The source deductions belong to the government.
Employer deductions
It’s important to note that CPP and EI contributions aren’t drawn from your employee’s earnings alone. As an employer, it’s your responsibility to match the amount of CPP you deduct from their paycheck. For EI, you’re required to contribute slightly more than your employee. And, of course, this too must be paid to the CRA.
Tip: To calculate what you owe in source deductions, check out the CRA’s Payroll Deductions Online Calculator (PDOC). It even factors in varying provincial and territorial income tax rates, making it super-accurate.
STEP 4: Remit source deductions to the CRA.
Once you’ve calculated the amount owing to the CRA, the easiest way to pay this (monthly) remittance is through the CRA website. You can also pay at any major financial institution or via your online banking account.
For most businesses, remittances are due on the 15th of every month. The CRA is quite a stickler for prompt payment. Do what you can to avoid late penalties. They kick in immediately and escalate quickly.
Tip: Once you establish a perfect compliance history, you may be eligible to remit payroll deductions quarterly, instead of monthly, which some small businesses find more convenient.
STEP 5: Close out your tax year by preparing your T4s
As the employer, you’re responsible for completing a T4 for every employee.
A T4 is a record of what’s been paid out in earnings and benefits as well as the CPP, EI and income taxes. Your employee(s) will use this slip to report their employment income when filing their own taxes.
As the employer, it’s also your responsibility to file a T4 summary report which shows all the tax amounts connected to your payroll program account. This is due at the CRA by the end of February.
If you’re a Québec employer, you must also file the T4 equivalent, Relevé 1 slip and an employer summary indicating the gross salaries paid, and Québec deductions at source withheld.
Consider the benefits of automating payroll from here on in
As a busy owner, it’s on your shoulders to ensure your numbers are correct and that your employee(s) – and the CRA – are paid on time.
For example: Annabelle creates and sells one of a kind art on Etsy. She hired her first employee, Matisse, and is about to calculate his very first pay!
First, she’ll take the number of hours Matisse worked and multiply it by his hourly rate to calculate his total pay before tax deductions. Then, using the most recent tax deduction tables, she will calculate what to deduct from his total pay, she can then pay Matisse what’s left.
Annabelle will also calculate her employer contributions, add them to Matisse’s contributions, and submit as a payment with her next payroll remittance.
If the thought of having to be this accurate and efficient is stressful, consider using payroll automation software to do the heavy lifting. Online payroll services like Quickbooks automate such tasks as filing taxes, processing direct deposits, generating payroll reports and calculating tax withholdings.
All of which frees up valuable time for you to focus on growing your business – and hiring your second employee.
Seem complicated? We got you.
TurboTax does all the heavy lifting, so you don’t have to. You answer a few questions and we’ll prepare your return with 100% accuracy.