Setting Up Payroll: The Ultimate Guide

If you’re reading this, there’s one thing to get out of the way right off the bat: congratulations! You not only started a business, but you’ve reached the point where you’re ready to hire some all-star employees and set up online payroll for the first time. You rock!

Want your own copy of our Guide to the Setting up Online Payroll? Download the full guide by clicking here.

Setting Up Payroll: The Ultimate Guide

But while setting up payroll is exciting, it can also be a little bit daunting—especially for payroll newbies. So before you let terms like “deduction types” and “parallel runs” deter you, take some time to peruse through our Ultimate Guide to Setting Up Payroll for Canadian Small Businesses. In this ebook, you’ll find information on everything from when to set up a new payroll system, to how to handle payroll taxes, and filing Records of Employment (ROEs).

And if your eyes are already starting to glaze over, don’t worry. We know payroll can be complex and even downright boring sometimes, which is why this guide includes only the most essential information. In other words, we’ve done your homework for you so we hope you enjoy our Cliff's Notes!

This guide is split up into 10 chapters — feel free to scroll down to the most relevant section right away.

  1. If Switching Payroll Providers: How to do it
  2. Choosing a (New) Payroll Provider
  3. Common Payroll Implementation Mistakes (and How to Avoid Them)
  4. Setting Up Your New Payroll Account
  5. Setting Up Income and Deduction Types
  6. Payroll Taxes and Year to Dates (YTDs)
  7. The Importance of Parallel Runs When Switching Payroll
  8. Filing an ROE
  9. What to do if switching Mid-Year
  10. Setting Up Your First Payroll Software — An Overview

    Chapter 1: How to Switch Payroll Providers

    If you’re setting up payroll for the very first time, you might want to zoom ahead to Chapter 2, but if you’re simply making a switch from one provider to another, you’ve come to the right place.

    Though it may seem like an administrative nightmare, switching payroll providers is actually a lot less of a headache than you think and it may even save you time in the long run.

    To help you make the leap from a less-than-perfect provider to your dream payroll software, we’ve put together a handy overview. There’s even a checklist at the end, so you can check off each step as you go.

    Step 1: Review Your Current Contract

    Not all relationships are meant to last forever, and you might have realized there’s a better fit out there for your specific payroll needs. But before you hastily “break up” with your current provider, take some time to review your current payroll contract. Take note of any cancelation fees or restrictions. For example, different providers have different restrictions on how long you can access your data after disengagement. It’s important to know these issues before you cancel your contract so that you can plan accordingly.

    It’s also important to review your contract so that you know how much notice you need to give your current provider. Though most cloud-based payroll providers will allow you to cancel your contract at any time, some companies require at least 30-days notice prior to cancellation. To ensure that no payrolls are missed in the process of switching, the best practice is to give yourself a buffer period.

    Step 2: Request ROEs for a Change of Provider

    When switching payroll companies, one of the most important things you need to do is request ROEs for a change of provider.

    As you probably already know, a Record of Employment (ROE) is an important document that reveals key information about a person’s employment history, including how long they worked, and how much they earned with an employer. Employers must issue a ROE each time an employee quits, is terminated, or experiences any other interruption of earnings (defined as seven consecutive calendar days with no work and no insurable earnings from the employer).

    However, ROEs are also required when switching payroll providers. In this case, you’ll need to ask your current provider to issue and submit an ROE to Service Canada for each employee after you process your last payroll with them.​ Not only is this an important step in compliance, but it’s also necessary to give your new payroll provider access to a comprehensive per pay period breakdown of insurable earnings so they can prepare ROEs on your behalf.

    If you’ve signed an ROE Web Authorization with your ​old provider, you’ll need to notify your new provider so that they can register as the new Primary Officer and electronically submit ROEs to Service Canada on your behalf.

    Step 3: Request Copies of All Payroll Register Reports

    In addition to requesting ROEs from your current provider, you’ll also need to request copies of all payroll register reports up until your last payroll. This is one of the most important pieces of information you’ll need, so don’t skip this step!

    If you’re unfamiliar, a payroll register report is basically a recap of the payments made to employees as part of payroll. In other words, the payroll register includes all the Year to Date (YTD) amounts of employee and employer incomes and deductions. For example, you’ll find key information like YTD wages, YTD CPP contributions, and other items such as RRSPs. If you’re switching mid-year, these reports will be necessary to set up your employees, both active and terminated, with your new payroll provider.

    It’s also important to keep in mind that as an employer, the CRA requires that you “keep all required records and supporting documents for a period of six years from the end of the last tax year they relate to.” You will likely need to ask your current provider for all of this information before your relationship is terminated. If you wait until after you’ve terminated your relationship with your current provider, you won’t have control over when important information like your payroll register reports will be handed over to you.

    Step 4: Request Copies of Pay Stubs

    As you’ve probably gathered by now, keeping full and complete payroll records is extremely important. That’s why you’ll also need to request electronic copies of all the pay stubs for all staff (including any terminated employees and contractors) from within the current fiscal year.

    Your new provider won’t have access to these pay stubs otherwise, which is why the copies and the information they provide are so important. These copies will also come in handy if any of your employees need to access their past pay stubs when you’re in the middle of switching providers.

    Step 5: Cover Your Year-End Bases

    Most payroll providers know that once you’ve made a switch, it’s the new provider that is responsible for filing year-end reports. However, year-end is a busy time, and it doesn’t hurt to cover your bases by explicitly clarifying this in writing with both your old and new providers.

    If the CRA does receive two sets of year-end reports from two separate providers, it could trigger an audit or a Pensionable and Insurable Earnings Review (PIER)—neither of which is a great situation to be in.

    Step 6: Notify Key Stakeholders

    Here comes the hard part: breaking up with your current provider. Having checked that you are providing the required amount of notice and have successfully run payroll with your new provider, kindly let your old provider know that you will no longer be using their services moving forward.

    If you’re so inclined, you can take the termination of your contract as an opportunity to have an open and honest conversation with your old provider about the level of service they offer. Most companies want to know what they did wrong, so your feedback can be useful in helping the provider improve their service for other customers.

    In addition to notifying your current provider, you’ll also want to give your team and your employees a heads up. Remember, switching payroll platforms affects more than just the person running payroll, it also affects those being paid. Therefore, it’s important to make sure that all stakeholders are aware of any upcoming changes.

    To sum up, we’ve put each step into a handy checklist:

    🗹 Review

    🗹 Year-End Reporting

    🗹 ROEs

    🗹 Payroll Register

    🗹 Employee Pay Stubs

    🗹 Give Notice

    Need more information about changing providers? Read our full guide to switching payroll companies.

    Chapter 2: Choosing a New Payroll Provider

    Whether you’re switching payroll providers, or you’re choosing a payroll provider for the very first time, you’re probably wondering where to start your search. Unfortunately, simply Googling “the best payroll software” will bring up a lot of options.

    To help you narrow down your search, we’ll cover everything from the very basics to some of the finer details.

    The Basics

    At the very least, payroll software should make the process of running payroll faster and easier. This means that software should automate as many payroll calculations as possible so that you save precious time on manual calculations. In other words, your payroll software should be doing the heavy lifting.

    Beyond doing the math for you, payroll software should also keep you compliant. When it comes to payroll, compliance means following all the payroll rules and regulations set out by the government and regulatory agencies. Payroll software providers should be up to date on the latest rules and regulations so that you don’t have to keep track of changing legislation. Many payroll providers will also forward your required payroll taxes to the authorities on your behalf, so that your business is always in full compliance.

    Key Considerations

    After making sure that a payroll software has the basics covered, it’s time to think about what specific features you need to run your business smoothly. Unfortunately, there’s no one-size-fits-all solution when it comes to small business payroll, so you will probably need to compare a few different options to find the right fit for you.

    When comparing different payroll software options, you’ll want to take the following considerations into mind:

    1. Type of software:

    Do you need a desktop or cloud-based software? This will likely depend on your work schedule and whether you want to have the ability to run payroll remotely.

    2. Ease of use:

    Is the software appropriate for payroll newbies or is it tailored to veteran users? If you’re new to running payroll, you’ll want something simple enough for beginners to navigate on their own. Conversely, if you’re well versed in the use of payroll software, you might want a more robust platform that can be customized to your specifications.

    3. Specific service requirements (beyond the basics):

    Do you need WCB/WSIB, off-cycle payroll, contractor payments, wage garnishment, HR management, etc.? Every business is unique and you need to find a software that checks off every box on your list of must-haves.

    4. Remittances:

    Does the software simply calculate the payroll taxes for you or does it file and remit those taxes on your behalf? If you want your payroll software to automatically remit payroll taxes to the proper authorities, make sure that the provider does this. You should also inquire as to whether there is an additional charge for this service.

    5. Cost:

    Will you pay a fee each time payroll is run or does the monthly cost include unlimited pay runs? Are there hidden fees for customer support or other features? Every provider has its own pricing model, so it’s important to understand how the numbers add up and what your total costs will be.

    6. The provider’s typical customer:

    Does the provider service small businesses or enterprise clients? Is the software built for a specific industry? Each payroll software is built for a different type of user, so you want to make sure that you choose a software that is designed to service clients like you.

    7. Payroll frequency:

    Does the platform support weekly, bi-weekly, semi-monthly, and monthly pay periods? Make sure that the software can accommodate how often you want to pay your employees. You should also inquire as to whether a change in payroll frequency impacts the cost of using the software.

    8. Integrations:

    Does the payroll software integrate with other accounting apps such as QuickBooks or Xero? What about other apps? If you want to be able to transmit data from other apps to your payroll software, you’ll want to make sure that a provider supports the software integration.

    9. Customer support:

    What is the availability of the support team? How can you reach the support team? You’ll need to know how and when customer support will be available when you need it.

    10. Software security:

    How does the provider protect your employee’s information? Do they encrypt their data? What about PIPEDA compliance? Ask about where your information is stored and what measures are in place to keep your data secure.

    While the above is by no means an exhaustive list, these key considerations will help you get a better idea of what to look for and what to ask when choosing a new payroll provider. And once you’ve drawn up your list of must-haves and nice-to-haves, you can always consult our Guide to the Best Payroll Software in Canada to see which companies can fulfill your specific needs.

    Need more help choosing a new payroll software? Read our guide on how to conduct a payroll software comparison.

    Chapter 3: Common Payroll Implementation Mistakes (and How to Avoid Them)

    It’s one thing to shop around and look at different payroll providers. However, making the leap and actually implementing a new payroll system can be an overwhelming process. As a result, implementation mistakes are common and can sometimes sour relationships early on.

    To ensure it’s smooth sailing from day one, we’ve highlighted some of the most common payroll implementation mistakes and how you can avoid them.

    1. Lack of Planning

    No matter how big or how small your company is, you need to have a plan in place before implementing your new payroll system. This involves tasks such as creating a timeline for the switch, identifying key stakeholders who will be impacted by the switch, ensuring that the right people will be available to facilitate the transition, and setting up training and support for those who will be using the new system.

    For instance, if you have 20 employees and one payroll administrator, you’ll probably be okay handling the transition on your own. But if you have 4,000 employees across 20 payrolls, having one payroll specialist probably isn’t going to cut it. If you’re dealing with a significant amount of payroll data, you might consider bringing in a data analyst to carry out the data extraction, or a project manager to coordinate the switch.

    When in doubt, you can always ask your new payroll provider what they recommend. In most cases, your new provider has carried out thousands of implementations, so they should be able to make recommendations for what is best for a team of your size.

    2. Not Maintaining Data Integrity

    In the immortal words of bookkeeper and Knit customer Sherri Lee-Mathers, “if you put garbage in, you’re going to get garbage out.” In other words, the kind of data you input into your new payroll system will influence what you get out. If the data is inaccurate from the start, it may become embedded in the system and result in significant errors over time.

    To avoid the “garbage in, garbage out” scenario, it’s important to prepare your data well in advance. Before making the switch, take the time to:

    • Audit your current data.
    • Cleanse your data of anything you might not need anymore (keeping in mind that the CRA requires you to “keep all required records and supporting documents for a period of six years from the end of the last tax year they relate to”).
    • Identify any missing payroll fields.
    • Request any important documents from your current provider, such as copies of all Payroll Register Reports and copies of pay stubs for all employees.

    While it may seem like a time-consuming process, taking the time to check for any inaccuracies or inconsistencies upfront will save you from countless errors down the line.

    3. Not Customizing the Platform

    For those unfamiliar with payroll processing or used to doing things manually, payroll software may seem like a kind of “one-size-fits-all” solution. In actuality, most payroll systems are extremely flexible and can be configured to fit your company’s exact needs. This means that companies that only work with the default settings are not getting the full benefits of the software.

    To ensure that you are enjoying the full benefits of your new software, you should take the time to customize the platform to your company’s needs before you begin running payroll.

    4. Failure to Map Out Integrations

    These days, it’s very rare for a payroll software to be the only technology that a company is using. Rather, payroll platforms are generally part of a company’s larger technology stack, which often includes accounting software, time-tracking apps, HR solutions, and more.

    However, problems often arise when companies fail to consider these integrations from the start. For instance, a payroll software may integrate with QuickBooks Online, but not offer a direct integration with other accounting software solutions such as Sage or Xero. If Xero is your go-to accounting software, you don’t want to find out halfway through the implementation process that there’s no way to connect your data.

    The best way to make sure that information is properly flowing from one app to another is to map out your integrations from the start and ensure that the payroll provider you choose can accommodate your requirements. Once you’ve found a provider that’s a good fit, get the help of your new provider to ensure these integrations are set up properly.

    5. Skipping the Testing Phase

    You wouldn’t buy a new car without taking it for a test drive, so why do the same with a new payroll provider? Unfortunately, many companies are eager to get started and skip the testing phase in an effort to save time. The problem is, this makes it much more difficult to know whether there are payroll errors or inconsistencies with your new software.

    Though it may seem like a bit of a hassle at the time, carrying out parallel runs is one of the best ways to test how your new payroll system is working. Addressed in more detail in Chapter 7, parallel testing simply means running your old and new payroll systems in parallel and then combing through the results to look for any inconsistencies. This kind of testing not only helps you to spot any errors before you go live with a new system, but it also gives you the peace of mind of knowing that your new payroll system is running as it should be.

    Need more information about implementation? Read our guide to a successful payroll implementation.

    Chapter 4: Setting Up Your New Payroll Account

    Most people assume that setting up their company and employee details is the easiest part of onboarding with a new provider—after all, who knows your company better than you do? But the reality is, mistakes are far more common than you think, and some can be tricky to change after the fact.

    To make sure you collect all the right information before you start plugging things into the new system, we’ve broken down the process for you and put together a handy pre-implementation checklist.

    What you need to set up your new payroll account:

    🗹 Business Information

    🗹 Employee Information

    🗹 Business Address

    🗹 Full Name

    🗹 Business Number and CRA Payroll Account Number

    🗹 Date of Birth

    🗹 Tax Rates and Remittance Schedules

    🗹 SIN

    🗹 Business Bank Account Details

    🗹 Bank Deposit Information (for Direct Deposit)

    🗹 YTD Amounts for All Employees

    🗹 Home Address

    🗹 ROEs Issued to Date

    🗹 Email Address

    🗹 Workers Compensation Information (WCB/WSIB)

    🗹 TD1s

    Business Address:

    Though this may seem obvious, the first step in setting up your company’s details is to ensure that you have the correct information for your company’s headquarters. You’ll need to know the street number, street name, city, province, postal code, and phone number associated with the address.

    Business Number and CRA Payroll Account Number:

    One of the first things you’ll need when setting up a new payroll account is a Business Number (BN). A BN is a unique nine-digit number that the CRA assigns to your business as a tax ID. Not every business needs a BN, but if you’re hiring employees, you’ll need to get one.

    Luckily, registering for a BN is fairly straightforward and the CRA allows you to complete the process online, by mail, by fax, or over the phone.

    While setting up your BN, you can also register for one or more of the five main CRA program accounts: corporate income tax, GST/HST, payroll deductions, import-export, and registered charity.

    Your BN is also part of a CRA payroll account number, which is made up of the following:

    • A 9-digit BN to identify the business
    • A 2-letter program identifier code to denote the CRA program account (RP for payroll)
    • A 4-digit reference number that identifies an individual CRA program account

    Your new payroll provider will ask you to enter your CRA payroll account number as part of the setup process. This payroll account is the account to which the source deductions are remitted based on your remittance schedule.

    Remittance Schedule

    Next up, you’ll need to enter your Remittance Schedule. If we just lost you, don’t panic. Figuring out what type of remitter you are is easier than you think.

    Your remitter type is based on your average monthly withholding amount (AMWA), from two calendar years ago (or from one month ago if you are a new employer). Your AMWA is the total of all the Canada Pension Plan (CPP), employment insurance (EI), and income tax you had to remit for the year, divided by the number of months (maximum 12) that you had to remit for. The CRA reviews your remitter type each year and will notify you if you remitter type changes.

    Quarterly Remitters: New Small Employers

    If you’re a new small employer, you may be able to remit quarterly instead of monthly. To qualify for quarterly remittances, you simply have to meet both of the following qualifications:

    • Each month, your monthly withholding amount (MWA) must be less than $1,000
    • You must maintain a perfect compliance history on all your GST/HST (RT) and payroll (RP) program accounts

    Quarterly Remitters: Small Employers

    Even if you’re not a new employer, you may still be able to remit quarterly instead of monthly if you meet both of the following qualifications:

    • An AMWA of less than $3,000 either one or two calendar years ago
    • Perfect compliance history

    Regular Remitters:

    You are a regular remitter if you satisfy the following qualifications:

    • You are a new employer, but do not qualify as a quarterly remitter
    • Your AMWA two years ago was less than $25,000, and the CRA has not advised you to remit at a different frequency

    Threshold 1 Accelerated Remitters

    You may also fall into one of two groups of accelerated remitters.

    You are a threshold 1 accelerated remitter if you had an AMWA of $25,000 to $99,999.99 two calendar years ago.

    Threshold 2 Accelerated Remitters

    You are a threshold 2 accelerated remitter if you had an AMWA of $100,000 or more two calendar years ago.

    Most businesses will be non-accelerated remitters, but you should always double-check before you enter your information because there are significant penalties for those who provide the wrong threshold information.

    Bank Account

    While your business address and BN are important parts of the setup process, your bank account details are especially crucial. Because if your baking information isn’t correct, it’s going to be pretty hard to pay your employees.

    When setting up your banking details, it’s best to have a cheque on hand to complete the following:

    • Bank name
    • Transit number
    • Account number

    Once you’ve entered your banking information, your payroll provider will need to ensure that the information is correct. Each provider has its own way of verifying this information. For example, Knit automates and simplifies this process by sending a micro deposit to the account you have entered. You will then need to enter the exact micro deposit amounts you received to complete the verification process.

    Setting Up Your Employees

    In addition to setting up your company details, you will need to enter the following information for each employee:

    • First and Last Name: this information should match the name on their bank account details.
      : note that employees below 18 years of age are exempt from contributions toward the Canada Pension Plan (CPP).
    • Home Address: this information will be displayed on their pay stub and year-end report (ie. their T4).
    • Province of Employment: in most cases, the employee will live in the same province in which they work. If the employee does live in a different province than the one in which they work, ensure that the correct information is entered into the system.
    • SIN: you should request each new employee's SIN within three days of the day on which their employment begins.
    • Email: an email address will allow the employee to access online employee portals and receive email notifications when pay stubs are available.
    • Bank Deposit Information: the employee’s bank account details are necessary for direct deposit.
    • Hire Date: select the first day that an employee began working at the company.
    • Federal and Provincial/Territorial TD1 Forms: used to determine the amount of tax to be deducted from an individual's employment income or other income, such as pension income.
    • Pay Group: assign the payroll frequency with which the employee will be paid.
    • Pay Rate: enter the employee’s gross rate of pay.
    • Pay Type: specify whether the employee is paid an hourly rate or an annual salary.

    Note that if you are setting up an independent contractor instead of an employee, you may need some additional information, such as the CRA Number (if the contractor is associated with a business).

    Setting up your company details and employee profiles can become a bit tedious, which is why some payroll providers have a mass-import feature. Mass-importing allows you to upload your employee details in batches, saving you more time on tedious data entry. Alternatively, payroll platforms such as Knit have a self-onboarding feature that allows employees to fill out their own details—a feature that means even less work for the administrator.

    Looking for more information about setting up your new payroll account? Read our overview of setting up payroll for small businesses.

    Chapter 5: Setting Up Income and Deduction Types

    In order to properly explain income and deduction types, let’s start by looking at the case of basic payroll. In the most simple and straightforward scenarios, payroll looks at an employee’s gross annual or hourly pay rate, and then divides it by the frequency of payroll, before applying the necessary taxes. This scenario is an income type known as regular wages. Most payroll providers will automatically calculate regular wages for salaried and hourly employees or contractors using their rate of pay.

    However, there are some cases where you will need to account for additional incomes and/or deductions beyond the regular wages.

    Income Types

    Payroll incomes simply refer to any income you might receive in addition to your regular pay. Some of the most common income types include bonuses, commissions, a car allowance, overtime pay, and others. These income types will not apply to every employee, therefore you will have to set up these income types yourself.

    When setting up income types, employers can often choose from a list of predefined earning types (although some platforms do support custom income types).  After adding the appropriate income types, the correct tax settings for each income type will be activated. Employers will also have to set up the additional earnings to be paid out per paycheque or once on the next paycheque.

    Deduction Types

    In addition to income types, setting up payroll also involves adding deduction types.

    Whenever you run payroll, a certain portion is always deducted from an employee’s income for payroll taxes. Therefore, deductions simply refer to the amount that an employee pays to cover employment expenses. Some of the most common deduction types include health insurance, life insurance, RRSPs, union dues, and more.

    Much like setting up income types, setting up your deduction types will generally involve choosing from a list of predefined deductions. Again, some providers will also support custom deduction types. After adding the appropriate deduction types, the correct tax settings for each deduction type will be activated.  It’s also worth noting that since most payroll providers automatically calculate source deductions like Canada Pension Plan (CPP) and Employment Insurance (EI), you do not need to set these up as a type of deduction.

    Looking for more information about incomes and deductions? Read our overview of payroll income and deduction types.

    Chapter 6: Payroll Taxes and Year to Dates (YTDs)

    Though it’s no one’s favorite topic, we need to take a moment to recap your tax obligations as a Canadian employer. It’s especially important to understand payroll taxes when making the switch to a new provider to ensure that you’re not underpaying or overpaying the CRA.

    Income Tax vs Payroll Tax

    Before getting into the nitty-gritty, we need to make a key distinction between income tax and payroll tax. In the context of small businesses, income tax is a type of deduction that the employer must withhold (take out) of each paycheque. The amount of income tax that you need to withhold can be found on the CRA payroll deduction tables.

    Employers must also deduct federal taxes such as CPP contributions, EI premiums, as well as any applicable provincial employer taxes (source deductions). These income taxes, federal taxes, and provincial taxes are all grouped together as payroll taxes.

    The difference is, income tax simply requires employers to withhold amounts from an employee’s pay, while EI and CPP require employee and employer contributions. The breakdown looks like this:

    • CPP: the employer must match the amount deducted from the employee’s paycheque.
    • EI: the employer pays 1.4x the amount withheld from the employee’s paycheque.

    For provincial and territorial payroll taxes, you can consult the CRA’s T4032 Payroll Deductions Tables.

    Your Income Tax Responsibilities as an Employer

    As an employer, you need to deduct income tax every time you pay an employee. This includes both federal income tax, and provincial or territorial income taxes. However, you do not need to do this when you pay independent contractors because contractors are responsible for managing their own income taxes.

    Remitting Your Taxes

    Okay, so you’ve withheld the correct income tax for each employee. Now what? As tempting as it may be to treat those funds as a short term loan, keep in mind that you need to remit (pay) these funds to the CRA on a regular basis—generally monthly or quarterly.

    As mentioned in Chapter 4, the timing of when you have to send your payroll taxes to the CRA depends on the average amount of payroll taxes you collect each month. In other words, historical amounts are used to determine your payroll remittance schedule.

    While you can calculate withholding amounts and manage remittances on your own, payroll software generally automates most of this process and help you avoid any missed payments to the CRA.

    Year to Dates (YTDs) and Switching Providers

    Now here’s where you need to pay extra close attention. Even if you’re well versed in payroll taxes, things get a little tricky when you’re in the midst of switching payroll providers.

    To set up payroll with your new provider, you will need accurate YTD amounts for all employees—including contractors and terminated employees if you plan to have your new provider help with year-end for terminated staff as well.

    To recap, the YTD amounts include all of the historical payroll transactions (what net amounts have been paid out, what has been remitted to the CRA) associated with each individual employee in a given calendar year so far. Only the current year's information is necessary. If you are running your first payroll with a new provider in January (with your first payroll in the new calendar year), you can completely skip the YTDs—just make sure you still have the data, or that your previous provider will still help you with T4s. You can find more information about YTDs and the payroll register reports in Chapter 1.

    You need the correct YTD amounts to set up your employees and ensure that you’re paying the correct amount of payroll taxes, and not over or underpaying. It’s especially important to ensure that YTD amounts are accurate before you run your first payroll with your new provider. This is because the YTD amounts need to be accurate for the T4s to be correct at the end of the year.

    If your YTD amounts are not correct, you may not be paying the correct payroll taxes. As you might have guessed, this will result in a PIER review—something you definitely don’t want to deal with.

    Need more information about payroll taxes? Read our guide to payroll tax and YTDs.

    Chapter 7: The Importance of Parallel Runs When Switching Payroll

    There’s nothing worse than switching over to a new payroll platform, only to find that things aren’t running how they should be. To prevent your worst nightmare from coming true, you should carry out parallel runs.

    What are Parallel Runs?

    Parallel runs means running the old payroll software parallel to the new software and then comparing the results—hence the name.

    The payroll cycles you choose for this run should reflect normal payroll cycles in order to provide an accurate representation of how the new system will perform during regular payroll cycles. If you choose to test irregular payrolls that involve unusual changes such as numerous salary increases or new hires, this may increase the likelihood of error.

    How to Carry Out Parallel Runs?

    To run a parallel test, you need to complete the following steps:

    • All the relevant information for a selected payroll cycle should be exported from the old provider. This includes information such as taxes and benefits.
    • The exported information should then be input into the new payroll system.
    • Payroll should be run using the new system.
    • The results from using the new system can then be compared to the old system to catch and address any inconsistencies.

    Who Should Carry Out the Parallel Runs?

    Since the new system is the one that will be used to run payroll from that point on, the parallel runs are usually carried out by the company’s dedicated payroll administrator. This not only provides an opportunity for hands-on training, but it also helps to catch any errors before the new system goes live.

    However, carrying out parallel runs does add to the workload of the payroll administrator. Therefore, additional support from others within the organization, or from the new provider’s support team, may be helpful during this transitional stage.

    How Many Payrolls Should Be Tested?

    Generally, two payroll cycles are used for parallel testing. It’s best to run these two payroll cycles consecutively to ensure that any errors are caught, addressed, and then re-run.

    Of course, each organization has different needs, so the optimal time and method of parallel testing may vary from business to business.

    How Should You Handle Discrepancies?

    After running a parallel test for one payroll cycle, it’s time to compare the results from the new and old systems line by line. If you notice a discrepancy, it should be noted, highlighted, and then categorized based on the cause of the error. Some of the causes of discrepancies can include:

    • Entry errors
    • Errors from the old system
    • Explainable differences (ie. rounding errors)
    • Errors attributed to rule creations
    • Unexplainable errors

    Once you’ve identified any discrepancies, these issues should be addressed as quickly as possible. Once corrected, further parallel testing should produce more accurate results. If unexplainable errors continue to persist, you should continue to run parallel tests until these issues are resolved.

    Remember, your new payroll system should not go live until you are certain that your payroll is running correctly and accurately. Even if your new provider thinks everything is looking good, both parties should be satisfied with the results before moving forward.

    You can find more information about parallel run testing with our handy overview guide.

    Chapter 8: Filing an ROE

    As mentioned in Chapter 1, ROEs must be filed each time an employee experiences a disruption in earnings and when switching payroll providers.

    In order for your new payroll provider to be able to prepare and submit ROEs on your behalf, you need to complete and e-sign the ROE web authorization form. Before doing this, there are a few things to keep in mind:

    • Before completing the ROE web authorization form with your new provider, all prior payroll data should be submitted to Service Canada through Change of Provider ROEs.
    • After the form has been signed, your new provider will submit a request to Service Canada to become the Primary Officer for your company's ROE Web account. Keep in mind that there can only be one primary officer account associated with any organization.

    Once you have signed the ROE web authorization form with your new provider, the information will be sent to Service Canada. It may take between four to six weeks for Service Canada to process the form. During this time, your new provider will not be able to prepare electronic ROEs for any of your employees who experience an interruption of earnings.

    Need more information about ROEs? See our guide to ROE filing for a change of provider.

    Chapter 9: Switching Mid-Year

    When asking about when to switch payroll providers, most accounting professionals will tell you that it’s best to wait until the end of the calendar year. In the past, this was because switching providers mid-year meant manually inputting all your payroll information from your old software, into your new one.

    However, times have changed and the rise of cloud-based software means that there are many more providers out there competing for your business. As a result, many of these providers will go out of their way to help you make the switch, even if it’s in the middle of the year.

    In other words, switching at the start of a new calendar year is ideal, but we don’t always live in an ideal world. We also know that sometimes switching mid-year is better than spending another six, eight, or even ten months with an inadequate provider.

    If you do decide to make the mid-year switch, there are a couple of things you’ll need to keep in mind:

    • Request a ROE for each employee to ensure that you have accurate YTD amounts on all insurable earnings (see Chapter 8 for more information).
    • Collect all the information from the payroll register reports up until your last payroll.
    • Ask for all of the paystubs for all staff (including any terminated employees and contractors) from within the current fiscal year. This is a good way to double-check the payroll register.
    • You will also need to provide the YTD information for each employee before you process your first payroll (see Chapter 6 for more information). YTD payroll is the amount of money spent on payroll from the beginning of the year (calendar or fiscal) to the current payroll date. if you are switching payroll providers and the employee has been paid during the year, enter the YTD amounts off the employee's most recent pay stub.
    • Request the most recent year-end reporting to review what was done in terms of completing and filing T4s and other year-end functions. You’ll want this so that you can prepare for the upcoming year-end.

    For a full explanation of switching payroll providers, refer back to Chapter 1.

    Need more information about a mid-year switch? See our guide to changing payroll providers mid-year.

    Chapter 10: Setting Up Your First Payroll Software—An Overview

    1. Switching Payroll Providers

    If you already use payroll software, you’ll need to take care of a few loose ends before you can start working with a new provider:

    • Review your current contract and take note of the cancellation terms.
    • Request ROEs for a change of provider.
    • Request copies of all payroll register reports up until your last payroll.
    • Request copies of pay stubs for all employees.
    • Clarify with your old and new providers who will be filing your year-end reports.
    • Provide the required amount of notice to your current provider and notify all key stakeholders.

    2. Choosing a New Provider

    There’s no one-size-fits-all solution when it comes to payroll, so it’s important to keep a few key considerations in mind when researching different software options:

    • Type of software
    • Ease of use
    • Specific payroll functions
    • Automated remittances
    • Cost
    • What types of clients the provider generally works with
    • Payroll frequency
    • Software integrations
    • Customer support
    • Security

    3. Avoiding Common Implementation Mistakes

    When implementing a new payroll solution, the best way to avoid issues is to learn from the mistakes of others. To ensure everything runs smoothly on implementation day, avoid these common mistakes:

    • Make sure you have a plan in place for the transition, including trained staff and a reasonable timeline.
    • Audit your current data before you input it into the new system to maintain data integrity. Remember, “if you put garbage in, you’re going to get garbage out.”
    • Configure the new platform to meet your company’s specific needs.
    • Map out integrations for other software and apps, such as Xero or QuickBooks Online.
    • Test out your new software by carrying out parallel runs.

    4. Set Up Your New Payroll Account

    You’re almost ready to run your first payroll with your new provider! But first, you’ll need to set up your company and employee details. For your company, you’ll need:

    • Business Address
    • BN and CRA Payroll Account Number
    • Tax Rates and Remittance Schedule
    • Business Bank Account Details
    • YTD Amounts for All Employees
    • ROEs Issued to Date
    • Workers Compensation Information (WCB/WSIB)

    To set up each employee, you’ll need:

    • Full name
    • Date of Birth
    • SIN
    • Bank Deposit Information (for Direct Deposit)
    • Home Address
    • Email Address
    • TD1s

    5. Income Types and Deduction Types

    In some cases, you will need to go beyond an employee’s regular wages and account for additional incomes and/or deductions.

    • Income Types: includes bonuses, commissions, car allowances, overtime, and more.
    • Deduction Types: includes health insurance, life insurance, RRSPs, and more.

    6. Payroll Taxes and Year to Dates (YTDs)

    In order to set up payroll with your new provider, you will need accurate YTD amounts for all employees, including contractors and terminated employees. This information can be found on the payroll register report from your old provider.

    7. Carry Out Parallel Runs

    To make sure your new payroll software is working as it should be, you’ll need to perform parallel runs. You can do this by completing the following steps:

    • Export all the relevant information from your old provider.
    • Input the exported information into the new software.
    • Run payroll with the new system. Generally, two payroll cycles are used for parallel testing.
    • Compare the new system with the old system and address any inconsistencies. Once corrected, further parallel testing should produce more accurate results.

    8. Filing and ROE for a Change of Provider

    In order for your new payroll provider to be able to prepare and submit ROEs on your behalf, you need to complete and e-sign the ROE web authorization form. Just keep in mind:

    • Before you complete the ROE web authorization form with your new provider, all prior payroll data should be submitted to Service Canada through Change of Provider ROEs.
    • After the form has been signed, your new provider will submit a request to Service Canada to become the Primary Officer for your company's ROE Web account. Note that there can only be one primary officer account associated with any organization.

    9. Run Payroll!

    You’ve dotted your i’s and crossed your t’s, so now it’s time to actually start running payroll! While running payroll will look a little bit different with every platform, here are a few key details you’ll need to take note of:

    • Paygroup (ie. weekly, bi-weekly, semi-monthly, or monthly)
    • First day of the pay cycle
    • Last day of the pay cycle
    • Pay date (NOTE: most payroll providers require you to approve payroll 2-3 business days prior to the desired pay date if employees are paid using direct deposit)
    • Hours worked
    • Add/remove income types

    Even if you’re a payroll veteran, it’s important to always review all of the payroll information before approving payroll. Remember, it’s always easier to fix an error before payroll is run than trying to correct it after.


    Believe it or not, you’ve reached the end of our guide to setting up payroll! Whether you’re switching providers or setting up payroll for the very first time, we hope that the information in this ebook helps you feel a little bit more confident in your payroll setup.

    Of course, if you have lingering questions, that’s okay too! You’re a business owner, not a payroll expert, and it never hurts to seek out more information.

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