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Navigating Today’s Payroll Challenges: A Quick Guide for Small Business Owners

Of all the important responsibilities in business, paying your employes in a timely and correct manner is close to the very top of the list – if not the top. Without happy employees, you don’t have much of a business future. So, it’s important to get it right the first time. It would be great if all you had to do was just a matter of writing a cheque, but payroll duties must be undertaken with one eye on your cash flow and the other on complying fully with all the Canada Revenue Agency (CRA) tax laws.

Below is a list of concerns that you need to be aware of when providing staff payroll:

#1. Select the Right Payroll System for Your Company

Manually processing payroll can be overwhelming, time-consuming, and prone to accidental errors. Consider using payroll software like Gusto, QuickBooks Payroll, or ADP. These programs automate calculations, tax withholdings, and direct deposits. Many of these platforms will also handle tax filings making it easier to meet to meet your compliance concerns.

#2. Stay Compliant with Tax Regulations

Payroll tax issues can be complex, with federal, provincial, and occasionally, local requirements. The CRA requires businesses to withhold income tax, Social Security, and Employer Health Tax, along with any employer-matched contributions. As mentioned, some provinces also mandate additional deductions. Hiring an accountant or outsourcing payroll can help ensure complete compliance and avoid penalties.

#3. Budget for Payroll

Employee wages and payroll taxes are one of the most significant expenses a business can have, so you are remiss when they are not factored into your company budget. Prudent operators also set up a payroll reserve fund to cover unexpected shortfalls or needs. A reserve fund will ensure that employees are paid on time, even if cash flow fluctuates or a major upset hits your business. Employees get nervous when there is any fluctuation or unusual circumstance surrounding their pay date. Reserve funds are cheap key person insurance policies. Why take a chance?

#4. Understand Employee Classifications

Misclassifying employees as independent contractors can lead to legal issues and fines. The employee can not determine their classification, nor can the business operator. This is a common but costly misconception. Employees require tax withholdings and benefits, whereas contractors do not receive benefits and manage their own taxes.

The Canada Revenue Agency document RC4110 outlines four conditions that must be used to determine an employee versus contractor relationship. They are:

1. Control – does the person direct their own daily activities or are they supervised? Do they set their own schedule etc.?
2. Ownership of tools – do they use a company phone? Do they receive calls at an office that is not theirs? Does the company pay for their car or a company gas card? These are all considered tools. Does the person maintain and purchase their own tools needed for the job?
3. Profit / Loss risk – who is taking on the risk in the relationship and the profits and losses of that risk? Is it shared or is it distinct to one party? Is the investment in the operation shared?
4. Integration – Is the person in question an integral part of the place they work, or can they be easily replaced daily by someone else? Are they integral to what they company does for business?

#5. Flexible Payment Options

One way I’ve found to improve employee satisfaction is by offering flexible payment options. While direct deposit is the most efficient way to pay your employees, some may prefer paper cheques or payroll cards. Some businesses also provide early wage access programs, allowing employees to access earned wages before payday. Few employees will ask for this option, but if it is part of your payment program, don’t be surprised if some take advantage of this benefit and then thank you for it.

#6. Maintain Accurate Records

Record management is an absolute in business. Keeping and storing accurate records can provide important reference material in case of an audit or dispute. In Canada, payroll records must be kept for at least 36 months. All employee hours worked, the wages paid to them, tax withholdings, and any benefits provided must be recorded, saved, and stored.

#7. Consider Payroll Outsourcing

If managing your payroll in-house seems daunting and overwhelming, outsourcing to a payroll service provider could be a welcome solution. It will not only save you time, but the service will strive to follow all rules to keep you in total compliance. Many firms offer complete full-service payroll management, handling everything from your tax filings to administering your employee benefits program. As your business grows, this will likely become a bigger consideration.

#8. Communicate with Employees

We’ve saved the most important point for last. The most important question an employee has for their employer is, “How do I get paid?” Few employers realize the major importance of this question. All employees want to understand their pay structure, benefits, what deductions are taken, and why. And they want to know this before they learn all the company history, their job duties and where the lunchroom is.

Recognizing the importance of providing clear pay information and being available to answer all payroll-related questions goes along way in gaining trust through transparency. Then, it’s important to get the assurance from the employee that they understand the pay program. An employee manual helps to provide a permanent record of your conversation, but only if you have one. But that’s a topic for another blog.