Many new and aspiring entrepreneurs dream of their enterprises growing to the point when they can hire employees. In doing so, these entrepreneurs are no longer working in the business; rather, they graduate to working on growing the business while managing others who are producing the actual goods or services. In fact, because there are only so many hours in the day, hiring employees is often the only way to grow a business beyond a certain threshold.
Bear in mind that deciding to have employees is a major responsibility, and can be full of complexity and consequences if you don’t do it right. In addition to your customers and suppliers, engaging in payroll means that you’ll have two new critical relationships: you’ll be dealing with employees who depend on you to make their living, and you’ll be reporting and remitting funds to the government, and the government does not pussyfoot around with its requirements of employers. Therefore, what follows is a list of the top considerations that businesses should review when getting started with payroll:
- Cash flow: can you afford it?
Ask yourself if, especially at the beginning, you’ll be able to afford paying one or more employees, and the associated payroll expenses [such as employer contributions for CPP (Canada Pension Plan) and EI (Employment Insurance)], before your business has a chance to grow and produce increased cash flow. Keep in mind that in growing a business, other expenses such as buying inventory will increase as well, and whenever sales do increase, it’s important that receivables are collected promptly so that cash flow is not compromised. Increased sales are exciting but meaningless if you can’t collect in time to pay for the increased expenses.
- Understand the impact that running payroll will have on your office. Cash flow and money aside, I can’t think of another common business process that requires as much consideration and compliance as running payroll. Every province and territory has its own employment standards for minimum wage and other details – for example, here’s the guide if you’re in Ontario.
Further to that, the federal government has employment standards regarding hours of work, overtime, vacation pay, statutory holidays, and so on. Yes, you’ve got to comply with all sets of employment standards that relate to your business. There are many compliance requirements regarding CPP, EI, income tax, employee advances, and the tax treatment of various benefit premiums, as well as forms for remitting and reporting: the TD1, Record of Employment, T4, and remittance forms for source deductions – here’s more information from the federal government. That’s a lot for anyone to know and do properly, and it’s a major burden for someone trying to run a business.
- Compare your options for running payroll: accounting software, manual or spreadsheet, and outsourcing to an accounting professional or payroll service.
If you’re going to calculate payroll manually or using a spreadsheet, understand that these methods leave many intricacies regarding payroll tax tables in your hands, such as when an employee has reached the maximum yearly wage for deducting CPP and/or EI. These maximums can and often do change every year. In fact, there are times when the tax tables change twice in a year. Accounting software takes care of these and other considerations for you. One big benefit of using accounting software such as QuickBooks to run payroll is that it validates each employee’s social insurance number. [Therefore, if an employee provides you with an incorrect SIN, you’ll know this immediately and you won’t have to wait until the government has received an incorrect T4 from you the following year, possibly triggering an audit.] Using accounting software also enables you to work seamlessly with your accountant, and ensures that your accounting records are up-to-date and that you are in compliance with government requirements.
If you are outsourcing payroll to a payroll service, be aware when the service is scheduled to take the payroll funds out of your bank account. Many take out all the funds at once, including all net paycheques, their payroll service fee and related sales taxes, and the source deductions payable, even if those source deductions are not due right away. Also, if you’re outsourcing to a payroll service, ensure that you or your accounting professional receive the payroll documentation for entering the payroll expenses properly.
- Don’t try and fool or short change the government!
Make sure that you don’t try to avoid the whole company contribution portion of source deductions by designating a worker as a “subcontractor” or a self-employed worker. There are litmus test guidelines to follow.Do not fool around with source deductions! Directors of incorporated companies or proprietors and partners in unincorporated ones are jointly and severally liable for a company’s unpaid source deductions, because source deductions owing are trust monies that really belong to the employees. That means the government can come after you personally. The Canada Revenue Agency knows all the tricks businesses try to pull, and they don’t take kindly to them.
These are just the main considerations off the top of my head. Having employees on payroll can help grow a business, but it’s a huge step and the responsibilities taken on by the employer are much greater than most entrepreneurs realize. Think twice about whether this route is for you. If I’ve scared you, my work here is done!
Esther Friedberg Karp, MBA, is president of CompuBooks Business Services in Toronto and holds a variety of QuickBooks certifications in Canada, the U.S., and the U.K. Her company’s clients hail from all industries in a number of countries, and they depend on CompuBooks to provide them with seamless administrative and accounting systems. CompuBooks also provides consulting and educational services to various accounting, technology and consulting firms worldwide.
In addition to being a featured speaker at accounting conferences, Esther has designed, authored, presented, and recorded educational courses for the Sleeter Group, Intuit Canada, Intuit, Inc., Intuit UK, Intuit Global, and others.
Esther can be reached at 416-410-0750 or firstname.lastname@example.org.