How to run payroll in Canada: A step-by-step guide for business owners
As a business owner in Canada, one of your important responsibilities is to ensure that your employees are paid accurately and on time.
Although at the surface this may seem like a simple process (process payments through a bank account twice a month, or just get set up on a payroll software), it’s quite a complex process that business owners need to understand.
That said as well, for some business owners, running payroll can seem like a daunting task. However, with the right guidance and tools, you can do it smoothly and efficiently.
In this blog, we’ll provide you with a step-by-step guide on how to run payroll in Canada.
Before Payroll is set up
First things first, you need employees in order to run your payroll, and there’s a lot of information that employees need to provide.
We’ll dive into this later in this blog, but when an employee is first hired, basic information like their social insurance number, banking information, personal information, and other data is critical.
The steps to running payroll
Once a business has employees on its (soon to be) payroll, and those employees are ready to get paid (which, is probably right away), businesses can follow these seven simple steps (plus one extra at the end) to run their payroll.
- Register for a payroll account
- Determine the payroll frequency
- Collect payroll information
- Calculate payroll deductions
- Pay the people
- CRA Payroll remittances
- File your T4s
Step 1: Register for a Payroll Account with the CRA
Registering for a payroll account with the Canada Revenue Agency (CRA) is an important first step for any business owner who wants to run payroll in Canada.
The process can be done online or by mail, and it’s important to ensure that you have all the necessary information before you begin.
To register online, you’ll need a Business Number (BN) and a CRA account. If you don’t have a BN, you can apply for one at the same time as you register for your payroll account.
To create a CRA account, you’ll need to provide personal information such as your name, date of birth, and Social Insurance Number (SIN). You’ll also need to choose a CRA security code and set up security questions.
Once you have your BN and CRA account, you can register for your payroll account by logging into your CRA account and selecting “Register for a payroll account”.
You’ll then be prompted to provide your business information, such as your legal name, business address, and contact information. You’ll also need to choose your payroll remittance frequency and provide information about your employees.
If you prefer to register by mail, you can download and complete Form RC1, Request for a Business Number (BN). You can then mail the form to the CRA along with any supporting documents and a letter requesting a payroll account.
Once your registration is processed, you’ll receive a payroll account number and other important information from the CRA.
That’s the first (and often most time consuming) task out of the way!
Step 2: Determine Your Payroll Frequency
Determining payroll frequency is an important decision for any business owner. The frequency of pay can affect employee satisfaction, cash flow, and administrative workload.
There are several factors to consider when determining the best payroll frequency for your business.
First, consider the needs of your employees.
Some employees may prefer to be paid weekly or bi-weekly for cash flow reasons, while others may prefer monthly pay to align with their expenses. It’s important to communicate with your employees to understand their preferences.
Second, consider the administrative workload and costs of running payroll. Weekly pay can result in more administrative work and higher processing costs, while monthly pay can reduce administrative work and costs.
Third, consider your cash flow and ability to meet payroll obligations.
Depending on your industry and business cycle, paying weekly may be challenging, while monthly pay may be more manageable.
In short, the best way to determine payroll frequency is to consider the needs of your employees, the administrative workload and costs, and your cash flow. Weighing these factors will help you determine the most appropriate payroll frequency for your business.
Step 3: Collect Employee Information
Let’s dive a bit deeper into the employee information side of payroll.
When setting up payroll in Canada, it’s important to collect certain information from your employees to ensure compliance with Canadian payroll regulations. Key information includes:
- Social Insurance Number (SIN)
- Full legal name and address
- Date of birth
- Banking information for direct deposit
- Tax exemptions and deductions (TD1 forms)
- Employment start date
Pay rate and hours worked
Collecting this information ensures that you can accurately calculate employee pay, withhold taxes and other deductions, and issue T4 statements at the end of the year.
It’s important to keep this information secure and up to date, and to inform employees of any changes in their payroll information.
Step 4: Calculate Payroll Deductions
Calculating payroll deductions accurately is crucial for Canadian employers to ensure compliance with federal and provincial tax laws. Here are the key steps to properly calculate payroll deductions in Canada:
Step 4a: Determine Gross Pay
To calculate payroll deductions, you first need to determine the employee’s gross pay. This includes regular pay, overtime, bonuses, and any other earnings.
Step 4b: Calculate CPP Contributions
Employers must deduct Canada Pension Plan (CPP) contributions from employee’s pay, and also contribute a matching amount. The employee and employer contribution rates for 2023 are 5.45%, up to a maximum annual contribution of $3,347.20.
Step 4c: Calculate EI Premiums
Employers must also deduct Employment Insurance (EI) premiums from employee’s pay, and also contribute a matching amount. The employee and employer contribution rates for 2023 are 1.62%, up to a maximum annual contribution of $1,013.68.
Step 4d: Calculate Federal and Provincial Income Tax
Employers must also deduct federal and provincial income tax from employee’s pay, based on the employee’s TD1 form and the appropriate tax tables. The federal tax rates for 2023 range from 15% to 33%, depending on the employee’s income level. Provincial tax rates vary by province and income level.
Step 4e: Calculate Other Deductions
Other deductions may include employee contributions to benefits plans, union dues, or garnishments.
Step 4f: Calculate Net Pay
Once all deductions have been calculated, subtract the total deductions from the gross pay to arrive at the employee’s net pay.
Properly calculating payroll deductions in Canada requires attention to detail and knowledge of federal and provincial tax laws. Employers must ensure that they accurately deduct CPP, EI, income tax, and other deductions, and remit these amounts to the appropriate authorities on time.
Step 5: Issue Paycheques and Pay Stubs
Once you’ve calculated payroll deductions, you can issue paycheques to your employees. Make sure you include a pay stub that outlines the gross pay, deductions, and net pay for each pay period. You can use a payroll software to generate pay stubs or create them manually.
Step 6: Remit Payroll Deductions to the CRA
As an employer, you’re responsible for remitting payroll deductions to the CRA on behalf of your employees.
The remittance frequency depends on your average monthly withholding amount. If your average monthly withholding amount is less than $15,000, you can remit quarterly. If it’s between $15,000 and $50,000, you can remit twice a month. If it’s more than $50,000, you need to remit at least once a week.
Breaking this down, however, here are the steps on how to exactly remit those payroll deductions you calculated to the CRA:
Once payroll deductions have been calculated, employers must remit these amounts to the Canada Revenue Agency (CRA) on time to avoid penalties and interest charges. Here are the key steps to remit payroll deductions to the CRA:
Step 6a: Create a Remittance Voucher
Employers can create a remittance voucher using the CRA’s online payroll deductions calculator or by completing Form PD7A.
Step 6b: Pay the Amount Owed
Employers can pay the amount owed through their financial institution’s online banking, by mailing a cheque, or in person at a Canada Post outlet.
Step 6c: File the T4 Summary
At the end of the year, employers must file a T4 Summary with the CRA, which summarizes the total payroll deductions and income for the year. The deadline for filing the T4 Summary is the last day of February.
Step 6d: Keep Records
Employers must keep records of all payroll deductions and remittances for at least six years.
Step 7: File T4 and T4 Summary Forms
At the end of each year, you need to file T4 and T4 Summary forms with the CRA.
These forms summarize the total income, deductions, and remittances for each employee for the year.
As an employer running payroll in Canada, it’s important to understand the process of filing T4 and T4 Summary forms with the Canada Revenue Agency (CRA).
It’s also important to understand the differences in those forms, so we’ve highlighted it below.
T4 Forms
T4 forms must be completed for each employee and summarize the total income, deductions, and tax withheld for the year. T4 forms must be filed with the CRA and provided to employees by the end of February each year. Employers can file T4 forms electronically using the CRA’s online service, or by mail.
T4 Summary Form
The T4 Summary form is a summary of all T4 forms filed for the year and summarizes the total payroll deductions and income for the year. The T4 Summary form must be filed with the CRA by the end of February each year. Employers can file the T4 Summary form electronically using the CRA’s online service, or by mail.
It’s important to file T4 and T4 Summary forms accurately and on time to avoid penalties and interest charges.
Employers should keep records of all payroll information for at least six years, in case of future audits or disputes. By understanding the process of filing T4 and T4 Summary forms, employers can ensure compliance with Canadian tax laws and maintain accurate payroll records.
Some extra steps and ways to better run payroll
Although we’ve laid out exactly what businesses need to do in order to run their payroll, there are a few extra steps and tools that we wanted to highlight to better serve your payroll needs.
Use a payroll software
The first tip for running payroll in Canada is to use software!
There are many payrolls software and tools available in Canada that can help automate and simplify the process of payroll. Here are some popular options:
- QuickBooks: QuickBooks offers a comprehensive payroll software that automates payroll calculations, tracks employee hours, and generates T4 and T4 Summary forms.
- ADP: ADP offers a payroll software that automates tax calculations, tracks employee hours, and provides real-time payroll processing.
- Payworks: Payworks offers a cloud-based payroll software that automates payroll calculations, tracks employee hours, and generates T4 and T4 Summary forms.
- Wagepoint: Wagepoint offers a payroll software that automates payroll calculations, integrates with accounting software, and provides compliance with Canadian tax laws.
- Wave Payroll: Wave Payroll offers a free payroll software that automates payroll calculations, tracks employee hours, and generates T4 and T4 Summary forms.
Using payroll software and tools can help businesses save time and reduce the risk of errors in payroll processing. Employers should evaluate their specific payroll needs and compare the features and costs of different payroll software and tools before selecting the best option for their business.
Hire a professional
Hiring a professional bookkeeper or accountant in Canada can be incredibly helpful for running payroll.
These professionals have the knowledge and expertise to ensure that payroll is processed accurately and in compliance with Canadian tax laws.
They can also provide guidance on payroll deductions, remittances, and filings, and can help businesses avoid costly mistakes or penalties.
Additionally, outsourcing payroll to a professional can save business owners time and allow them to focus on other important aspects of running their business.
Overall, hiring a professional bookkeeper or accountant can provide peace of mind and ensure that payroll is processed accurately and efficiently.
At Valley Business Centre – Bookkeeping & Payroll, we know how to be those professionals to help support your payroll needs. We know it’s a tricky industry to navigate, which is why for over 30 years, Valley Business Centre has been providing comprehensive bookkeeping, tax, and remote bookkeeping services to our clients in Whistler, Squamish, the Sea to Sky Corridor and metro Vancouver B.C. areas. Valley Business Centre provides reliable and effective services to all clients.
Disclaimer
This article is written for informational purposes only. It is current at the date of posting and changes to laws and regulation may result in the information becoming outdated. It is not intended to provide legal, tax, or financial advice. It is recommended that readers get advice from a tax professional before making any final decisions.
