Payroll Tax – What You Need to Know
Processing payroll is one of the most basic responsibilities of an employer, but small-to-midsize businesses sometimes struggle with keeping up with the paperwork and ever-changing payroll tax regulations. In Canada, processing payroll includes, among other things, complying with the Canada Revenue Agency's requirements and remitting accurate payroll deductions.
Instead of wading through seemingly endless payroll tax rules and regulations, employers can break down their payroll tax tasks into the following five steps:
1. Open and operate a Canada Revenue Agency (CRA) payroll account.
Canadian businesses that run payrolls must have a Business Number, which is a 15-character identifier for a business. The first nine digits consist of numbers, and the remaining six characters identify a particular tax account. Businesses that have not yet secured Business Numbers can register online or send in their paperwork via mail or fax.
A business that already has a Business Number simply needs to add a payroll account to its existing CRA accounts. To do this, use CRA's Represent-a-Client service online, have an employee or representative take care of the process through your CRA business account online, or complete a Business Consent Form and mail it in.
2. Collect information from employees and complete TD1 forms.
Once your payroll account is operational, verify employees' social insurance number (SIN) and have them complete federal and provincial TD1 forms. This task should be taken care of as part of the hiring process.
In Canada, most non-monetary perks, such as employee-provided room and board, the use of a company car, or free parking, is considered a taxable benefit and must be added to employees' income prior to making payroll deductions.
3. Assign payroll deductions for employees.
Once employees' income has been adjusted, deduct the following three items from each employees' pay: income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums.
4. Remit payroll deductions and employer contributions to the CRA.
After the first time a business remits payroll deductions and employer contributions to the CRA, they will receive a remittance form in the mail each time remittance is due. The first time, however, the business has the responsibility to send a cheque or money order to the Receiver General with the appropriate amount of money. It's important to write the Business Number on the back of the cheque to avoid confusion.
In addition to the cheque, send along a letter explaining that the business is a new remitter. Include in the letter the period the remittance covers, the Business Number, and complete contact information for the business.
5. Complete year-end T4 Slips and the business's T4 Summary form.
All Canadian employers with payrolls must complete a T4 Slip for each employee. These forms may be filled out electronically or on paper, but they must be delivered to employees by the last day of February.
The T4 Summary form summarizes the T4 slips given to a business's employees. All totals on T4 slips must match totals listed on the T4 Summary form. Again, the T4 Summary form may be filled out and submitted electronically.
All business records that support claims made on payroll documents must be kept for a period of six years, either at the place of business or at the owner's residence. Failure to comply with Canadian payroll requirements may result in fines ranging from $1,000 to $25,000, imprisonment up to 12 months, or both.
For help with handling payroll tax, contact The Payroll Edge to speak with professionals with years of experience. Our professionals stay up-to-date on the ever-changing laws and requirements affecting payroll taxes and are well known by federal and provincial authorities.