Payroll is one of the most important processes of your entire business. Simply put, if your small business has employees, you have to pay them — and you have to pay them regularly and correctly.

Sounds like a no-brainer, but it can be more complex than it first seems. There is no room for error in executing payroll. Staff payment problems can lead to low morale and poor productivity — and it can even raise red flags that lead to a dreaded CRA audit.

Use payroll software to manage source deductions
Luckily, the days of managing payroll ledgers by hand are long gone and high-quality payroll software can help you manage things like source deductions, such as federal tax, CPP contributions, EI premiums, benefit plan payments, and other tedious and bureaucratic headaches.

But, some manual grunt work is still necessary, which leaves room for human error, mistakes and oversights. Here are the top three payroll mistakes to avoid. 

1. Not having all of the proper documents or not filling them out correctly. The CRA requires a fair amount of paperwork to be in order for all of your employees. And then as a business, you need certain things as well. The best way to make sure you don’t forget anything is to create a new-hire checklist of everything to gather from the person, or provide to the person. On it should be:

·      Obtain a Social Insurance Number (SIN).

·      Have the new-hire fill out a TD1 form and Personal Tax Credits Returns form.

·      Draft a letter of employment that clearly states salary, job duties, start date, work hours, probation period, vacation accruement, benefits and any other terms or conditions specific to employment at your company. Of course, this letter of employment must comply with the employment standards of your province or territory.

·      Receive bank information for paying your employee by Electronic Fund Transfer (ETF). Pro-tip: We make this point clear to any new employees by simply saying, if banking information isn’t provided, we can’t pay you. This usually gets their attention pretty fast and gets us the information we need.

2. Assuming you understand all of the rules. Canada’s tax laws are complex. Things like vacation time and statutory holidays, for example, are processed differently depending on whether an employee is full time or part time. This is where having good payroll software comes in handy. It’s also where having a good accountant comes in. (Don’t worry, we know one or two.)

3. Failing to remit source deductions. Once you navigate the process of paying your employees correctly (and on time), as a business owner, you are not yet done with payroll. The money you withheld from each paycheque — known as source deductions — must be remitted to the CRA in a timely manner. If you don’t make the remittance, your business will face a stiff penalty, directors can be held personally liable for the full amount (no hiding behind a corporation) and CRA may take a greater interest in your business’s bookkeeping and accounting practices in general.

Know the difference between contractors and employees
 When talking about payroll errors, it’s also important to mention that more and more small business are choosing to hire independent contractors to perform specific roles rather than full or part-time employees. It’s an effective way to reduce costs.  But make sure that you are treating the contract worker as just that — an independent contractor.

Because, if the CRA determines that a contractor actually fits the criteria of an employee (for example, as the employer you have the right to hire, fire or dictate the time, place and manner in which the job is performed) your business will face penalties and be responsible to remit all unpaid back taxes.

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