Understanding how payroll works is a very simple process once you learn the basics. Even if your business only has one employee, knowing how to handle payroll yourself can be beneficial in many different ways. Payroll Accounting allows you to take care of all your company’s financial needs without having to rely on someone else or hire an expensive accountant.
This guide will walk you through the steps of setting up and maintaining a payroll system for your small business.
What do I need in place before starting my own payroll system?
Before you can even consider starting your own payroll, there are a few factors that need to be taken care of first. Decide if you want to hire an accountant who will handle your payroll, or if you want to take care of it yourself.
If you choose the latter option, then your business needs to be registered as an employer. You also need to have a method of ensuring that your employees are paid for their work. The best way to do this is by setting up direct deposit with the bank.
What are the different types of payroll taxes?
Payroll Accounting system requires knowledge about two main forms of taxation. Both have different factors that need to be considered, so they will be discussed separately below.
- Provincially-mandated tax deductions.
Each province has its own list of salaries, wages, commissions, bonuses and other types of income that are subject to provincial tax deductions. The full list can be found by contacting the government directly. Some common forms of income that face provincial taxation include:
- Salaries or wages you pay any employees in your company
- Bonuses you promise to certain employees for their performance
- Commissions you pay to certain employees for their work
- Other types of income your business may have, such as investment earnings or lottery winnings
In order to figure out what provincial tax deductions apply to your salary, you must know which province the employee lives in.
- Federal tax deductions.
The federal government has a list of taxable items that are subject to taxation by the Income Tax Act.
Employees’ income is also taxed under this act, which means that you will have to withhold income tax from their earnings each pay period. This is done by adding up all the money you pay them throughout the year, and then claim a certain percentage of that as income tax.
The full list of taxable items for the Income Tax Act can be found on the CRA website.
Payroll deductions for employees’ contributions.
Employees are required to contribute to the Canada Pension Plan (CPP) each year, but their employers must also contribute the equivalent of 1.4% of their salary, up to a maximum amount. This is taken off each pay period, so you should keep an eye on how much your employees are taking home each time they receive a paycheck.
Payroll deductions for Employment Insurance benefits.
Employees who have recently lost their job are entitled to EI benefits. If the money they made during that time was high enough, then they are required to claim these benefits from their former employer.
The amount you have to deduct depends on how much the employee earned in the last year.
Payroll deductions for other factors.
There will be certain times throughout the year when your employees will have to pay for other factors that affect their earnings.
These deductions can include things like income tax refunds, medical expenses above a certain amount or statements of account from the revenue agency.
How much should I deduct if my employee owes me money?
If one of your employees owes you money, then this will affect the amount you take out for deductions under your payroll system. If they still owe you money after two years, then it should be taken off their salary as a debt until the problem is resolved.
How to create a payroll register.
If you do not want to make mistakes while making your company’s payroll, then it is important for you to carefully monitor the information that goes into this process. This will require creating a payroll register, which has three different parts: Employee, Deductions and Insurable Earnings.
To create a payroll register, you must first know your employee’s exact name, which is required if they are filing certain types of tax slips. Next, enter their social insurance number so that you can accurately calculate how much to deduct for income tax. If this person works part-time, then it is important for you to keep track of the hours they have worked so that you can calculate how much they are owed.
