Paying an employee (or employees) is a bigger effort than simply determining the amount you’re going to pay and making those payments. It means adding a whole other level of paperwork and responsibility.
After all, if your business is paying an employee, CRA wants a piece of each paycheque. Sole entrepreneurs don’t ‘need’ to pay themselves, but businesses with employees are legally required to make deductions and remit on behalf of their employees. These deductions may include taxes, pension contributions and/or insurance premiums, as well as the company portion of CPP and EI.
And CRA sticking its hand out for these payments means a whole lot more paperwork and meticulous recordkeeping.
Before hiring your first employee for your growing business, ask yourself why it’s needed. If your answer is simply that your business is growing larger than you can manage on your own, consider first whether it’s possible to add a roster of contractors rather than employees.
Independent contractors can often be hired to fill temporary needs. And a contractor is not an employee; therefore he or she is not paid through payroll. Instead, a contractor invoices for services rendered. No such CRA deduction obligations exist when paying independent contractors because they are just that – independent. The CRA responsibilities fall to the contractor, not the small business.
Contractors can be hired to complete short-term projects or on a regular weekly or monthly basis to complete a certain task (such as a bookkeeper) without any repercussions to the business from CRA (other than the requirement to report the payments on a T4A each year).
If, as a small business, a temporary or occasional need is not what you need filled, then perhaps hiring employees is the road you need to go down. If that is the case, the first thing you need to do is call the CRA and request a payroll account which is your Business Number ending in RP0001.
After that, you need to set up a system to calculate the variety of taxes on the salaries paid, remit them to both the federal and provincial governments and prepare annual reports to prove that your calculations are indeed correct. To compete these tasks, CRA online allows you to calculate the costs manually, accounting software such as Quickbooks can be used or – since all of this can end up being time consuming for business owners who would rather (and should be) working on generating sales and building their business – hire an accountant or bookkeeper to take care of all of the heavy lifting.