Setting up the Payroll System for your Small Business
- mybookkeeperdonna3
- Jul 15
- 3 min read
Managing employee payroll can often seem daunting for small business owners, despite being a straightforward task.
Determine Your Payroll Calculation and Payment Method
SOFTWARE IN-HOUSE
Software solutions like QuickBooks and Sage offer robust payroll modules. These tools facilitate the use of timesheets, allowing you to allocate employee hours by job, project, or location. They also perform job costing by employee during payroll processing. Employees can log their time using an app, which integrates with the payroll module. Direct deposit payments can be automated through Interac debit if desired. If you are unfamiliar with payroll processes, it is advisable to have a professional bookkeeper set up your payroll system and assist with initial payroll runs. This software can generate payroll stubs, T4s, and government remittances.
OUTSOURCE PAYROLL TASKS
You may choose to outsource payroll to your bookkeeper or a dedicated outsourcing company. Proper setup is crucial. If you lack the software or prefer not to manage payroll internally, outsourcing is a viable option. Banks and companies like Ceridian offer payroll outsourcing services. You provide employee information once, submit hours, and they handle the rest.
MANUAL IN-HOUSE PROCESSING
If opting for manual payroll processing, the CRA provides a payroll calculator for assistance. Excel can be used alongside the CRA calculator to manually prepare T4s at year-end.
Download Manual T4
Use the Payroll Calculator Online
Required Information for New Employees
Gather necessary information from employees, such as a bank deposit slip for automatic payments or outsourcing purposes. Obtain a TD1, Personal Tax Credits Return Form, within seven days of their start date to determine federal and provincial tax deductions.
Download the TD1 Form
Ensure a comprehensive letter outlining company policies, job role, pay rate, payment frequency, holidays, and hours is provided to new hires for a smooth onboarding process.
Employee or Subcontractor?
Subcontractors are treated differently from employees. Deductions for Employment Insurance, Canada Pension Plan, and Income Tax are not required. Subcontractors submit invoices for payment like any vendor. Misclassifying employees as contractors can lead to significant penalties, interest, and legal costs, along with outstanding payroll deductions.
Determining Subcontractor vs. Employee Status
Revenue Canada provides criteria to determine if a worker is an employee or a subcontractor. They consider whether the individual has other clients, who controls work hours, and adherence to company guidelines. For instance, can the subcontractor work with competitors?
Revenue Canada on the Subcontractor Test
Compliance with Employment Standards
Setting up payroll requires adherence to provincial employment laws, which become more complex as your workforce grows. Considerations include overtime rules, holiday pay, and leave laws. Many businesses opt for payroll solutions that automate policies to reduce errors. Employment standards typically cover:
Pay statements and frequency
Minimum wage and overtime
Vacation and holiday pay
Work hours and breaks
Visit Employment Standards for Ontario
Maintain Accurate Payroll Records
Maintaining updated employee records is a legal obligation. Records should include pay rates, hours worked, and amounts paid, including overtime and vacation pay. These records support year-end tax filings and the issuance of Records of Employment. Centralizing employee records in an HR system is recommended for easy access.
Select the Appropriate Payroll Processing Option
Choosing the right payroll processing solution is crucial for accurate and efficient payroll management. Options include in-house processing, either manually by a professional or using payroll software, or outsourcing to a trusted partner for end-to-end management. Mastering payroll basics allows small business owners to focus on business growth.
Contact Us to Learn More About Expert Payroll Management for Your Small Business
Great insights in this post! Setting up the right systems from the start is key to avoiding issues down the road. Effective payroll administration not only ensures employees are paid accurately and on time, but also keeps small businesses compliant with tax regulations. Thanks for sharing such practical tips!