As a small business, handling payroll taxes is a big responsibility, and making a mistake can be complex, risky, and expensive, so it's important to make sure you know what you're doing. Payroll for small companies is best handled by a payroll company, who can handle all the ins and outs of payroll taxes for you. This list will give you an idea of some of the trickiest aspects, and most common mistakes associated with payroll taxes.
1. Misclassifying Workers
A big audit issue today is misclassifying workers. It's tempting to treat workers as independent contractors, because payroll taxes and employee benefits costs are so high, while a company's responsibility to an independent contractor is much lower. Unfortunately, you don't get to choose the label for the worker. Classification depends on whether you have sufficient control over the worker, i.e. having the right to say when, where, and how work gets done.
2. Not Using an Accountable Plan for Employee Reimbursements
If you're paying for travel, entertainment, tools, or other business costs for employees, you're wasting employment tax dollars if you're not using an accountable plan. With such a plan, you're able to deduct the expenses, but avoid payroll taxes on reimbursements, as employees do not have any income from reimbursements.
3. Failing to Keep Payroll Records
You are required to maintain payroll records, and have them available to present for CRA inspection, if necessary. These should include time sheets, expense accounts, and other payroll records, and should be kept for about four years.
4. Choosing to Pay Creditors Before the CRA
When you're in the money, it may be tempting to pay the landlord, vendor, utility company, etc. But it's important to make paying your payroll taxes a priority, because as a business owner, you are a "responsible person," who remains 100% liable for "trust fund" taxes (amounts withheld from employees' wages). This is the case even if your business is incorporated or is a limited liability company. The best plan is to set aside cash to cover payroll taxes so that you won't use these funds for any other purpose.
5. Failing to Monitor Payroll Company Activities
Many small businesses turn to outside payroll companies to handle the job of figuring out withholding and transferring funds to cover payroll taxes. As an employer, even if you use an outside payroll company, you remain the responsible party. It's your company, your money, and your employees, so it's important you keep yourself in the loop on everything the payroll company is doing.
The most important thing is to stay on top of your employer responsibilities, so that you can avoid any unnecessary complications, and any penalties from the CRA. Payroll companies for small businesses can take the brunt of the responsibility off of your shoulders, so that you don't have to stress so much about paying attention to the minutiae of payroll. Outsourcing payroll can save money and time, especially during tax season. Outsourcing to payroll companies means only one report to approve, and one invoice to pay.