How Companies Can Pay Employees on Business Payroll

June 5, 2024

An image of a Markham CPA reviewing a small businesses payroll

Every business starts as a partnership or a one-person company. As the business grows, you feel the need to hire employees. While hiring the right talent can expand your business reach, employees bring a lot of paperwork. As an employer, you can hire freelancers or have full-time employees on business payroll. Salaries might be one of your most significant expenses, so you want to do it right from the beginning. 

How Entrepreneurs Can Set Up a Business Payroll?

Let’s examine the components, requirements, and procedures of business payroll. Setting up a business payroll requires strategic, administrative, and financial decisions. 

Determine Workforce Requirements and Employees’ Salary Structure 

Before jumping on to the administrative part of the business payroll, you must work out the strategy and how your employees fit your business expansion plans. Most organizations struggle as they hire more than the required workforce. You don’t want to hire in bulk and keep employees idle. That’s a huge cost to bear. 

It is better to go back to the drawing board and work out the workload, staff requirements, skills needed, and industry-standard pay for that role. If the work is cyclical, you might want to outsource it or hire a freelancer or part-timer instead of a full-time employee on the business payroll.

Remember, an employee on the payroll comes at an additional cost. You have to pay them even if they were on the bench. And not to mention the administrative cost of pay slips, taxes, deductions, benefits, and more. Plan your workforce requirements meticulously.

Determine Employees’ Salary Structure 

Once done with the strategic part, it is time to work out the financial angle. To get the right talent, you will have to offer competitive pay. You could consider creating a pay range where you can negotiate. When determining the salary structure, you can have a fixed component for some roles and fixed and variable components for some. You can pay an employee on an hourly basis. Employees who work 8 hours a day or 40 hours a week are entitled to overtime pay. 

You can also reimburse your employees for cell phone or parking costs. Some of these costs might have tax benefits. A professional accountant can help prepare a tax-efficient salary structure. 

Also, note that you may have to increase the salary annually or give performance bonuses. While a salary hike will be permanent, a performance bonus can be a one-time pay. You might want to add the cost of employees to your cash flow forecast to see how much you can incur without stressing your finances. You might also want to look at the frequency of your client payments to determine the payroll schedule – weekly, once in two weeks, twice a month, or monthly.

Get a Business Number with the CRA 

Now for the administrative part. Register your business with the Canada Revenue Agency (CRA) and their payroll program. You can simultaneously apply for the Business Number (BN) and payroll program account through the CRA. The registration form requires payroll information like pay schedule and number of employees.

The 9-digit BN number gives your business an identity with the federal government and is used in all proceedings. You can have multiple payroll accounts for permanent employees and contractual workers.  

Enrolling an Employee in The Payroll 

Once you have your CRA payroll account, it is time to enroll employees in the payroll system. As an employer, you must collect and maintain accurate, complete, and updated employee records like name, address, phone number, Social Insurance Number (SIN), date of birth, and bank account information for direct deposit. The employee’s name on your records should be the same as in their SIN.

As an employer, you must inform new employees to submit federal and provincial TD1 forms within seven days of their employment beginning. This form helps determine their payroll deductions. Failure to submit the form will attract a penalty of $25 for each day of delay. 

Know the Payroll Deductions 

The CRA requires every employer to deduct a certain percentage of salary towards the Canada Pension Plan (CPP), Employment Insurance (EI), and income tax. This percentage is updated annually. There is also a minimum and maximum earnings threshold that complicates the calculations. 

Payroll software automatically calculates these deductions based on the information provided in the TD1 form. Once you set your business payroll, it is time to operationalize it. 

Steps To Process the Payroll 

Maintain records: When processing the payment, you have to maintain all business records that justify the payment:

·Employees’ pay rate

  • Number of hours worked. 
  • Amounts paid each payday (including vacation pay, overtime pay, and sick leaves)
  • Records of Employment (including start dates)

Reconcile Payroll: Using the above data, you can calculate the amount to be paid on the pay schedule. Even though the payroll software calculates the amount, you might want to verify it with your tax records and general ledgers to ensure your deductions, payments, and journal entries match. 

Once you are sure the amounts are correct, it is time to disburse the salary as direct debit or paychecks. 

Give pay slips: Once the salary is credited into employees’ accounts, the employer must issue pay slips that act as proof of income for employees when applying for loans and leases. Now for the next part of the transaction. 

Remit deductions and taxes to the CRA: You must remit the tax, CPP, and EI deductions to the CRA by the 15th of every month. If the monthly schedule doesn’t work, established businesses can opt for a quarterly, twice-monthly, or four-times-monthly payroll tax remittance. 

Give Form T4: While the above process will happen according to the pay cycle, each employer must generate Form T4 and give it to their employees by the end of February of the following year. This form summarizes an employee’s earnings and deductions from the previous calendar year and helps them file their taxes before April 30. 

Business payroll can become complicated and prone to mistakes. Large organizations have a dedicated payroll department to handle all the calculations and record keeping. However, small business owners could consider outsourcing this task to professional bookkeepers. 

Contact KSSP Partners LLP in Markham to Help You With Your Payroll System

A skilled bookkeeper is well-versed with the CRA’s record and documentation requirements. They can set up an entire workflow, map the smooth working of the system, and provide you with updated information on the expenses and income to help you maintain sufficient liquidity. To learn more about how KSSP Partners LLP can provide you with the best bookkeeping and payroll expertise, contact us online or by telephone at 289-554-5997.