It can be easy for Canadian small business owners and operators to get caught up in unnecessary payroll complexity. In fact, according to this Canadian government report from 2019, nearly 90,000 small businesses are shut down every year. Effectively managing your payroll is a critical step in ensuring your business' longevity and overall success.
If you're a small business, you must ensure that you are adequately managing your payroll, no matter what stage you are at. Our blog has many resources that help you navigate managing and calculating payroll in Canada.
Today, we will walk through a step-by-step process for calculating your payroll with a payroll calculator. This guide will give you the tools you need to identify what steps are required for calculating payroll tax in Canada, your specific obligations as an employer and best practices on how to calculate payroll tax with a payroll calculator.
What is payroll?
Let's start with the basics. What is payroll? A company's payroll outlines all employees, wages, and the deductions taken from those wages. Many small businesses now use in-house personnel, applications or cloud-based software such as Knit Payroll to streamline the process of paying your staff and ensure any deductions are calculated correctly. Learn more in our robust blog post.
What are deductions? In short, deductions incorporate everything your business is required to remit under the law. Deductions include Employment Insurance (EI), Canada Pension Plan (CPP) contributions and federal and provincial income tax.
In both EI and CPP, deductions follow specific contribution frameworks built out by the CRA. Taxes (provincial and federal) follow schedules set out by the federal government and each province. You must ensure your tax deductions follow the guidelines set for your specific province. Deduction amounts differ year-to-year and depending on your employees' primary place of residence.
IE: if you operate in Alberta but have employees living in Quebec, you have special considerations to follow to ensure you follow the correct Quebec tax deductions.
As a small business employer, you have three significant payroll obligations to your employees:
1) Paying Wages
As an employer, you must provide your employees with a regular, recurring payment schedule, either monthly or bi-weekly.
2) Remitting Deductions
The Canadian Revenue Agency (CRA) requires you, as the employer, to collect specific deductions from employee pay. These include:
- Federal and Provincial Income Tax
- Canada Pension Plan (CPP)
- Employment Insurance (EI)
3) Ensuring Compliance
Along with paying your employees regularly, you must remit all "source deductions" by the 15th of the month, once your employees have been paid. Source deductions are the money taken from employee wages.
To ensure compliance, small business owners must provide a T4 and T4A tax slip to their employees before the last day of February of the calendar year following the deduction period, which means that the T4 slips for the 2020 calendar year must be sent out by February 29th, 2021.
Learn more about what you must provide your employees for payroll on our blog.
Using a Payroll Calculator to Calculate Payroll in Canada
In Canada, calculating payroll involves identifying and determining gross pay. This is then followed by subtracting any deductions and payroll taxes to help you arrive at net pay. When used correctly, a payroll calculator can ensure no mistakes in net pay that you issue to your staff or taxes paid to the CRA.
Calculating your small business payroll is a regimented process that should be followed meticulously. The Canada Revenue Agency offers a free online payroll deductions calculator to help you validate the amount of CPP, EI and income tax deductions they are required to remit yearly.
If you opt to use a payroll calculator this year, be aware that the calculator's results and information are merely estimates. Making a mistake can lead to compliance issues, or worse yet, CRA penalties!
Below are some easy-to-follow guidelines to consider when using a payroll calculator.
1. Provide the tool with accurate information. Any calculations that the payroll calculator presents are only as precise as the information you input.
2. Note that there is an amount of risk involved in this "DIY" approach to payroll. As per the Canada Revenue Agency's website, "you assume the risk associated with using this calculator."
3. Understand the regulations and tax variances between provinces. You can ensure compliance by using the correct calculator for each province your company operates in or has employees working from. For example, the CRA Payroll Deductions Online Calculator (PDOC) is not applicable in Quebec, and therefore would not be useful.
4. Ensure your calculator is based on the most recent CRA legislation and changes.
Whichever calculator you use, make sure that it accounts for any new and updated legislation. Within the last year alone, there have been a few changes due to the pandemic that SMBs must be aware of. Read more here.
Feeling stuck? We can help.
When calculating payroll, an online payroll calculator is a handy tool. But if you feel overwhelmed or stuck or need more guidance to ensure compliance and your obligation to your employees, Knit can help.
We can help small businesses streamline their payroll operations and reduce the risk of costly errors, especially as we contend with different rules and regulations in the wake of the COVID-19 pandemic.
Contact us today to learn more about how we can help you calculate your small business payroll seamlessly.