5 Easy Steps on Setting Up Payroll for your First Employee

Whether you run an online store or provide busy homeowners with landscaping services, if your business is expanding, you might need to hire someone. Perhaps you’ve been working on it by yourself all along. Perhaps you’ve been hiring independent contractors or workers as needed. In either case, you’re taking the risk and hiring your first employee!

As an employer, the CRA is counting on you to maintain complete records of your employee’s working hours, pay, deductions, and other information you’ll need for tax purposes.  Enter payroll.

It’s not as difficult as it sounds to set up a new employee on payroll. Particularly if you adhere to these five simple steps.

STEP 1. Open a payroll account with the CRA.

Payroll setup is rather simple if you already have a business number (BN).

Your existing CRA account will receive a 15-character payroll program account number when you add a “payroll account” to it (that includes your nine-digit business number). This number will be used by the CRA to recognize your business and maintain track of it in terms of taxes.

When you go through the process of opening a payroll program account, you will instantly receive a business number if you don’t already have one. You can find the Québec employer’s kit here.

STEP 2. Gather Employee Information

Even your employee cannot avoid the paperwork that comes with payroll. The initial tasks for your new employee are to submit to you their Social Insurance number (SIN) and to complete Federal TD1 and Provincial TD1 forms.

You can use the data on these forms to determine how much income tax to deduct from their wages. There is no need to provide the CRA this paperwork. Only save it for your records.

Employees in Québec are required to submit the TP1015.3-V Source Deductions Return in addition to the Federal TD1 form.

STEP 3. Calculate and set aside deductions for the CRA

Employee deductions

Paying new workers comes with a twist for employers called source deductions.

You must first deduct federal and provincial income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums on their behalf before issuing your employee a check for their gross earnings. Their “net” earnings, or the sum that is left over, is reflected in the check they received. The government owns the source deductions.

Employer deductions

It’s crucial to understand that not just your employee’s earnings are used to pay CPP and EI obligations. It is your obligation as their employer to match the CPP deduction you make from their income. You must make a little bit more of an EI contribution than your employee does. Naturally, this must also be paid to the CRA.

Tip: Use the CRA’s Payroll Deductions Online Calculator (PDOC) to determine your source deduction debt. It is so accurate that it even takes into account different provincial and territorial income tax rates.

STEP 4. Remit source deductions to the CRA. 

Once you’ve determined how much you owe the CRA, paying this (monthly) remittance online through the CRA website is the simplest option. Additionally, you can pay online using your bank account or at any major financial institution.

Remittances are typically due on the 15th of each month for most businesses. The CRA is very strict about on-time payments. Try your best to prevent late payments. They start right away and pick up speed.

Tip: Remitting payroll deductions quarterly rather than monthly, which some small businesses find more convenient, may be possible once you establish a perfect compliance history.

STEP 5. Close out your tax year by preparing your T4s

You are responsible as the employer for completing a T4 for each employee.

A T4 serves as a record of the earnings, benefits, CPP, EI, and income taxes that have been paid out. When filing their own taxes, your employee(s) will use this slip to declare their employment income.

You must submit a T4 summary report, which lists all the tax amounts related to your payroll program account, as the employer. The CRA must receive this by the end of February.

If you are a Québec employer, you must also submit the T4 equivalent, Relevé 1 slip, employer summary, Québec deductions at source withheld, and a summary of the gross salaries paid.

Tip: Consider the benefits of automating payroll from here on in

As a busy business owner, it falls to you to make sure your financial statements are accurate and that your employees – as well as the CRA – are paid on time.

If the idea of having to be accurate and efficient makes you anxious, think about using payroll automation software to handle the grunt work. Online payroll programs like Quickbooks automate processes including tax filing, direct deposit processing, payroll report generation, and tax withholding calculations.

All of this gives you more time to concentrate on expanding your business and employing a second employee or more.