By Kevin Zimmer, Payroll Specialist at IBEX.
Payroll challenges begin before you even hire your first employee. After that, things just get more and more complicated…
Before you hire your first employee, in Canada the biggest payroll issue is making sure you consider income tax and the Canada Pension Plan (CPP) whenever you take money out of the company to pay yourself. This is where many new entrepreneurs get tripped up.
Many startup executives go for a while without getting paid at all. Then, when profits and/or investments start to allow it, they start taking some money for themselves. The problem comes at the end of the year, when you have to report the income to Revenue Canada (Canada’s IRS), but forgot to pay CPP premiums and income tax. If you’ve taken out all you can, and there’s not much spare money leftover (and this is often the case), you may not have the cash to pay the government. The result—late payments and penalties—is not fun.
The right way to handle this is to pay the CPP and tax as you go. Don’t wait until you file your personal tax return. Or, make sure you set aside at least 35% (call IBEX or use the online calculator on the CRA website if you want a more exact estimate) of whatever you take home so that you have the cash to pay at the end of the year.
CRA will start to insist on quarterly payments if you do the “pay at the end approach,” especially as the amounts get larger; over $3,000 in tax due at the end of the year will trigger a requirement to pay CRA quarterly.
One benefit of owning your own business is that you don’t have to pay Employment Insurance (EI) premiums on your earnings. At least that’s something! Although, if you get pregnant or things don’t work out—you won’t be able to access EI benefits either.
Once you hire someone, things get more complicated. You’re required by law to deduct appropriate EI, CPP and tax amounts from just about anything you pay your employees. You’re also required to submit the money you deduct, along with the employer portion of the CPP and EI (yes, you have to top up what the employee is already paying) to CRA at extremely specific intervals.
The collection and remittance of these deductions, referred to as source deductions, is something you don’t want to mess around with. The penalties for late remittances pile up quickly, and CRA has very little sympathy for businesses that mess around on this stuff. Once you start remitting, you’re firmly on their radar. We recently posted a horror story that we were brought into a few years ago, which illustrates this vividly.
We feel that there are only two ways to handle the employee situation. The first one is to purchase payroll software, like the payroll add-on for QuickBooks, or a stand-alone system like CanPay or EasyPay, and use this software to do your calculations and tell you how much to pay the government. You then manually pay CRA each month and take care of filing other government forms at year end (eg. T4’s) or when someone leaves (ROE’s) by yourself.
The second approach is to outsource your payroll with a company like IBEX. I think the outsourced approach is the way to go for start-ups (bet you saw that coming!). With two employees, the annual fees to have an outsourcer take care of paying your employees by direct deposit, paying the government for you, and otherwise keeping you out of trouble is around $300. That’s less than a lot of the software, and best of all you don’t have to know anything about payroll, other than how you want to compensate your people. The outsourcer will make sure you come across as a professional employer from day one.
When new business owners spend too much of their time and energy doing payroll themselves, we often tell them, “You can be the best in your industry at doing your payroll, but you will go out of business if your competition is focusing on what really matters while you try and reinvent the payroll wheel.”