What is payroll in Canada?

Payroll in Canada is the compensation an employer must pay to each employee for a set amount of time on a given date. It is usually managed by an accountant or the HR department. Some small or medium-sized businesses will have one particular person or payroll employee who is in charge of calculating payroll for the entire company.

Learning how to do payroll is an essential part of managing a business. Since there are many ways in which you can do payroll, it is important to find the one that works well for you and the company.

There is a need to be able to carefully weigh the size of your business with your budget so that you do not run into a deficit. Paying attention to rules and regulations around taxes is also very important as this will make sure your company is safeguarded from getting in trouble with the government.

How to do payroll

When deciding on how to do payroll, you first have to set up the basic process. To start, you’ll need to provide the federal and provincial/territorial governments with certain information.

The first bit of information you’ll need is the Payroll Program Account number which will allow you to file taxes for the business. The Payroll Program Account number, also known as the RP is given to any registered business for free and you can get one online if you do not have it already.

You will also have to collect information from each employee. Each employee should have a Social Insurance Number (SIN) which they need to provide you in order to process their salary.

Also, each employee needs to fill in a TD1 Form for both the federal government and provincial governments. These forms will show you exactly how much income tax to withhold from employee wages in order to pay taxes. These forms should be updated yearly as the totals for withholding can change from year to year.

Now that you’ve collected the information you need from employees, you will have certain choices about when people get paid. The following are the different options when it comes to compensating employees:

• Weekly pay: suits manual labour jobs with low wages.
• Biweekly pay: best for hourly workers because overtime is typically charged by the workweek.
• Semi-monthly pay: often used for salaries employees due to the predictable working hours and wages of these positions
• Monthly pay: not very common in most businesses as the amounts paid to each employee can be more difficult to budget in a small or medium-sized business.

Choosing a payment schedule will come down to your overall running budget and what works best with your individual company.

Once this has been decided on, you’ll have to register for workers’ compensation insurance. Workers’ compensation insurance can be used in case of injury or illness. Each province has different laws surrounding this, so it is important to check with local authorities as to what the expectations are.

Some businesses will also open a separate bank account for their payroll. This can help you keep accurate records of your payroll transactions and will be handy during tax season.

5 steps to calculate payroll

Now that all the preliminary work has been done, it is time to calculate payroll for your employees. Here are five easy steps to help you do these calculations in an efficient manner.

Step 1- calculate hours worked and gross pay

The first step the payroll employee needs to do is calculate how many hours each employee has worked during the pay period. Having ways in which employees can clock in and out of work will help you with this process and keep track of the information.

For example, workers could have time sheets that they have to submit weekly for approval so that you know exactly how many hours that employee worked. Once you’ve figured this out, you simply multiply the hours of work by their pay rate and come up with their gross pay.

Also, remember to note if employees have worked any overtime hours. Each province or territory will have different rules around how much you have to pay workers for overtime so make sure you know the regulations for your area.

Related: Taxing Bonuses in Canada

For example, you might have to pay workers one and a half times their regular hourly pay if they work overtime. This will affect their gross pay so make sure you know the exact hours each employee is working for each shift.

Step 2- process payroll deductions

Now that you’ve calculated the gross pay for each employee, you have to take away the deductions that are owed to the government.

Before you do this, also calculate any pre-tax deductions that you might give your employees as part of their compensation. For example, if your company puts money into a Registered Retirement Savings Plan (RRSP) then you need to calculate this before calculating the tax deductions.

Once this has happened you can proceed to take out the tax deductions. Things that would be taken out at this step are:

• Federal and provincial income tax
• Canada Pension Plan (CPP)
• Employment Insurance (EI)
• Any local tax deductions- for example, the Employer Health Tax (EHT) in Ontario or the Quebec Parental Insurance Premium (QPIP)

The last deduction you have to calculate would be things such as benefit fees or union dues.

Once you’ve figured out the payroll deductions you can move on to the next step.

Step 3- calculate net pay and pay employees

Once you’ve done your gross pay and deductions calculation you can now calculate each employee’s net pay. You simply take away the deductions from the gross pay and you will have what you have to pay each of your employees. This will be when you can pay your employees either electronically or via cash or cheque. Regardless of how you pay them, make sure to give them a copy of their pay calculations or pay stubs so that they can keep the information for their own income taxes.

Step 4- file tax reports

In order to keep within government regulations you must then file your tax reports. This will be the information you calculated during the deductions step, so you should have all the information you need for each employee.

Make sure to double-check local regulations when performing this step. Each province and territory has different deductions you have to calculate so it is always good to double-check that you have done your due diligence.

To file your tax reports, you’ll need to have a “My Business Account” from Canada Revenue Agency (CRA) which you can find online. There you will find all the information about filing tax reports and what other information you may need. 

Related: How to Open a CRA Payroll Account

Step 5- document and store payroll records

This final step is crucial in order to make sure that you do not get in trouble with the government. Also, if your business or one of your employees ever does get audited, it is important to have detailed records of all your payroll transactions.

Your records have to include:

• hours worked by each employee
• amounts you withheld for CPP, EI and taxes
• all tax forms filled out by your employees- TD1, Personal Tax Credits Return
• any letters you received from the CRA
• any information about registered pension plans

Keeping records is a very important part of payroll in Canada, so make sure you keep as much information as you can.

Following the correct steps to calculate payroll in Canada is important to safeguard your company against getting in trouble with the government. When starting a new business or expanding an older business, following the steps in this guide will help you learn how to do your payroll calculations. Remember, however, to consult local authorities and to seek professional help whenever you see it necessary.