How to Set Up Payroll for Your Small Business: Complete Guide

The critical part in setting up your small business payroll is choosing a method. While many organizations have run manual payroll systems previously, technology has advanced dramatically through the years. As a result, many digital payroll programs are easy to set up and regularly input information to handle all of your small business needs.

If you are a small business owner, learning how to set up payroll for your company can save money on overhead costs by doing it yourself. This task is not complicated, and you can handle it in only a few steps. 

The critical part in setting up your small business payroll is choosing a method. While many organizations have run manual payroll systems previously, technology has advanced dramatically through the years. As a result, many digital payroll programs are easy to set up and regularly input information to handle all of your small business needs. 

Small Business Payroll Necessities 

When learning how to set up payroll for your small business, you must complete the processes correctly to avoid issues when paying your employees or penalties from the government for incorrect remittances. 

When you set up your payroll correctly, employees receive their pay on time in the correct amounts, bookkeeping will remain accurate, and remittances to the government will be within the set deadlines to avoid penalties. 

When starting a small business payroll, you will need to focus on these critical items: 

  • Determine how to pay your staff 
  • Decide on a payroll frequency 
  • Construct a payroll policy 
  • Have a dedicated individual for payroll duties 
  • Choose a payroll system 
  • Know your federal, provincial, or territorial payroll laws 
  • Set up your payroll with the government 

Determine How To Pay Your Staff

Small businesses have various ways they can pay individuals who complete work for them. For example, you may have hourly or exempt employees, seasonal workers, or contractors. Each of these groups will require different payroll requirements. 

Full-time, hourly, and part-time employees will typically receive a set wage that includes overtime if necessary. Exempt employees can be on a set salary, where they will make the same payroll amount no matter how much time they work in a set payroll period. 

Seasonal and contract workers may require alternative pay, depending on their requirements. Some contractors will not have deductions since they take care of their CRA remittances themselves. Depending on the seasonal workers you employ, their short time in employment may not justify withholdings for Employment Insurance or other employment taxation requirements.  

Decide On a Payroll Frequency 

The choices for payroll can differ between companies. Some of the more popular options for paying employees include: 

  • Monthly: 12 pay periods per calendar year
  • Bi-monthly: 24 pay periods per calendar year 
  • Bi-weekly: 26 or 27 pay periods per calendar year

These frequencies do not mean that your business cannot choose something different. For example, you may pay individuals once a job is complete rather than bi-weekly if you have contract workers. 

Construct a Payroll Policy 

When first setting up your payroll for a small business, you should have a payroll policy in place. This document should be available to all employees and contractors as part of their personnel file or employment contract. 

Although the policy is not a legal agreement, it can help avoid misunderstandings regarding receiving money for completed work. 

Have a Dedicated Individual for Payroll Duties 

Managing employee payroll can be tedious and challenging to complete when you are busy taking care of other duties as a small business owner. That does not mean small business owners cannot handle their company payroll, but some do not. 

Assigning a dedicated individual for your payroll tasks can make the entire process easier. Alternatively, if you do not have someone in-house knowledgeable in payroll tasks, you can outsource this job to a third-party company to handle it. 

Pros of a Third-Party Payroll Company

  • Saves you time 
  • Will use the most up-to-date employment tax guidelines 
  • Eliminates the need for a dedicated employee for payroll duties 

Cons of a Third-Party Payroll Company 

  • Can be costly 
  • Business owners are still responsible for all remittance filings 
  • Any mistakes are still the responsibility of the small business to rectify 

Some small businesses will start with the owner completing the payroll duties and later passing on the task as they grow and take on more employees. 

Choose a Payroll System 

If you do not hire a third-party company to handle your payroll tasks, choosing the best payroll system for your small business is essential. You can find many online and digital payroll programs with similar features and attributes applicable to small businesses. 

The options for free payroll programs are limited, though. However, several viable solutions are relatively inexpensive for small business owners who want to handle their payroll in-house. 

Some choices for a payroll system for your company include: 

There are many other options to choose from in the market, but your company’s needs can help you make the proper selection. For example, some software programs are strictly for payroll only, while others incorporate human resources tasks and benefits. 

Keep in mind that the more features these digital programs include, the more money you can pay to use them. Therefore, if your company does not need all the different aspects of a program, it could be better to select a less expensive program with fewer attributes. 

Know Your Federal, Provincial, or Territorial Payroll Laws 

Although the federal employment standards are the same across Canada, they can change from year to year. Each province or territory in Canada will have varied income taxes they require. Some regions, like Quebec, require additional information when completing employee payroll. 

Your payroll administrator must keep updated on any employment laws for proper tax filings and accurate bookkeeping. Mistakes with payroll tax withholdings can be costly for your employees and your business. 

Set Up Your Payroll With the CRA

For any small business operating in Canada, it is a simple process to learn how to set up payroll for your employees. However, before you begin paying out staff for hours worked, your company will need to go through these five steps to ensure you establish the payroll correctly and accurately with the Canada Revenue Agency (CRA).  

Step 1 – Collect Personal Information of Employees

Each person you employ will need to fill out a TD1 Personal Tax Credits Return from the Canada Revenue Agency (CRA). You will find both federal and provincial/territorial forms for each employee. They will remain in the employee files for future reference. 

These forms help determine how much payroll tax you as an employer will need to deduct from any wages. Each province or territory will have varying amounts, so you must select the proper forms for your business location. 

Anyone working for a wage requires a social insurance number (SIN) from the Government of Canada. You must obtain each employee’s SIN when they begin working for you. If they do not have one, they can apply for one and provide it to you within three days of receiving it. 

SINs help gauge the amount of Canada Pension Benefits individuals will qualify for when they reach retirement age. If this number is incorrect on payroll reporting, it can affect their pension amounts later.

Step 2 – Set Up a Payroll Program Account With CRA 

The CRA requires all businesses to enroll in a Payroll Program Account when deducting funds from their employee’s wages. This account helps identify your small business to the CRA whenever you are in contact with them. 

You will receive a 15-digit Payroll Program Account number. This number includes your nine-digit registered business number, a two-letter code for the program (RP for the payroll program), and a four-digit reference number to identify multiple accounts. 

If you do not have an active registered business number before now, the CRA will assign one to your business at this time. 

Your small business Payroll Program Account with the CRA will include the following information: 

  • Number of employees receiving payroll 
  • Payroll frequency, such as bi-weekly, bi-monthly, or monthly
  • Date of the first wages paid to employees
  • Duration of months coverage for employees payroll 
  • Any payroll service used, if applicable 

For some businesses, the country of the head office, parent company, or affiliate is necessary also. If your business belongs to a franchise, you must include the franchisor information in your Payroll Program Account. 

Step 3 – Calculate Deductions and Payroll Contributions 

You will need to determine the number of deductions and payroll contributions to withhold from every employee’s gross income with each scheduled payroll. These items include Employment Insurance (EI), Canadian Pension Plan (CPP), and Income Tax for federal and provincial/territorial areas. 

Many digital payroll systems will determine these amounts automatically from the information you input. Alternatively, you can manually calculate them with the online calculator through the CRA website. 

Once you have the proper amounts to deduct from your employee’s gross pay, you can forward the remaining net amount to your employees. Employers will also have their portion of deductions to submit to the CRA. The employer amounts for EI, CPP, and income taxes will vary from what each employee pays. 

All of the money from these necessary deductions and payroll contributions from employees and the employer portions should be in trust in a separate business account until you remit the total amount to the government. Keeping it out of the business operating account will help ensure your bookkeeping is accurate and there is no confusion when it comes time to remit it to the CRA. 

Other deductions that you may take from an employee’s revenue will not go to the CRA. These amounts come from optional health and dental benefits, short and long-term disability insurance, social committee payments, or RRSP contributions. Many of these deductions are not mandatory and require an agreement from the employee to withhold from their gross pay. 

Step 4 – Remit Payroll Withholdings to CRA 

The due dates for remitting all payroll withholdings do not depend on the frequency of pay periods. Typically, how often you forward these deductions and payroll contributions is based on the total amount. 

Quarterly remittances are more than sufficient for many small businesses since they cover amounts from $0 up to $2,999. Quarterly payments to the CRA are due by the 15th of the month following the previous quarter. For example, the January to March period requires your small business to remit all payroll withholdings by April 15th. 

As your business grows and the remittance amounts increase, your company may have to change the schedule to monthly or even accelerated payments to the CRA. 

If you have nothing to forward to the CRA, you are still required to send in a NIL remittance. For example, this situation can happen if you employ seasonal workers or contractors who did not complete any pay during the previous quarter. 

Step 5 – Complete Annual Payroll Summary Returns 

Every small business needs to complete an Annual Payroll Summary Return with all the corresponding slips and submit it to the Canada Revenue Agency before the last day of February for the previous year. Your company may have to fill out more than one slip, depending on the type of income you pay your employees.  

Any late filings can result in fines or penalties for your small business that can cost you thousands of dollars. However, your company will not have to worry about missing these deadlines with proper care and completion. 

In Conclusion 

Although it can be cumbersome when learning how to set up payroll for your small business, once it is complete, it becomes easier. With digital payroll software, you can add or delete employees, change the payment schedule or remittance frequency times, and make adjustments often in minutes. 

As a business owner, keep in mind that you are still responsible for all payroll deductions and remittances to the CRA as they come due. Managing the payroll for your employees is just one of your jobs as a business owner and should not be your only job. With the proper software or using a dedicated payroll company, you can ensure your business operations can continue to run smoothly without worry.

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