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Whether you process payroll in-house using payroll software or manual methods, there are five key payroll functions you need to account for as a small business owner. These payroll features are common to small business owners in the US or Canada.
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Accurate Payroll Calculations
It all starts with math. If you don’t have the right payroll amounts, it won’t matter if you pay your taxes or your employees on time.
The government makes it easy enough with their payroll calculators, whether you are paying employees in the US or in Canada.
In the US, the IRS recommends that employees use the Tax Withholding Calculator to determine if they are required to provide their employer with a new Form-W4. In Canada, the CRA provides a Payroll Deductions Online Calculator (PDOC) you can use to generate the payroll amounts for your employees.
Alternatively, your payroll software should be able to provide you with the gross payroll amounts for each pay cycle once you input an employee’s pay rate and their tax withholding based on the Form W-4 in the US and the TD1 forms in Canada.
In a payroll software solution, the obvious benefit is that employee history is being captured with each pay cycle and calculations are fully automated. Most payroll softwares include an option to add additional income types or deductions that can also be taken into account for payroll calculations.
Compliant & Timely Tax Processing / Filing
The second key payroll function revolves around tax compliance.
Payroll taxes in the US are far more complicated than Canada, in part because there are over 11,000 jurisdictions that comprise federal, state & local tax agencies.
If you are processing payroll manually, this payroll function is about making sure you pay and file federal, state and local taxes, at the right time.
All small businesses are assigned a deposit schedule, either monthly or semi-weekly, based on the total tax liability reported on their Form 941 for a look-back period. Once you’ve confirmed which deposit schedule your business follows, you are responsible for depositing the Federal Income tax along with the employer and employee contributions towards Social Security and Medicare as per that schedule.
If you are using software to manage your payroll, you’ll have the option to automate this function completely. By and large, all payroll solutions can handle Federal tax filing, but state-specific and local taxes might cost you more. That said, it’s a price worth paying if you don’t have to take on the responsibility of calculating the right payroll amounts and then writing out checks to pay these amounts.
Some cloud-based payroll solutions can even directly deposit the funds with the different tax agencies on your behalf. This can save you a lot of time and money since the tax amounts are being calculated automatically and as such, it minimizes the risk of penalties.
In Canada, all Federal and Provincial taxes are remitted to the CRA, and to Revenu Quebec, if you are a small business owner in Quebec.
This makes it simple enough for employers to write a cheque out to the CRA / Revenu Quebec once or twice each month, but using payroll software can come in handy because remittances can be fully automated.
While there are four remitter types in Canada, most businesses fall under a non-accelerated remittance i.e. New / Regular Remitter or an accelerated remittance schedule if your average monthly withholding amount is larger than $25,000.
Similar to the US, automation around tax processes ensures that your small business is fully compliant, and it also avoids the risk of hefty penalties from missed or incorrect remittances.
Direct deposit functionality or Manual Checks
You’ve done all the payroll calculations, and you know what’s owed to the government. Excellent work!
The next key function you are responsible for is actually paying your employees.
You have two options when it comes to paying your employees – you can go the manual route with checks, or you can deposit their paycheck directly into their bank account.
As a small business owner, the manual option is fine if you only have an employee or two, but even with low employee counts, there is still room for error with checks. In addition to the risks of check fraud, which in itself is a $4.3 Billion annual problem, you also have to check, check and check again [pun intended] to make sure that the net amounts are transcribed on the check correctly.
Direct deposit is a handy way to ensure that employees get paid on time, and it saves them the hassle of picking up the check and then depositing it in the bank. Another benefit of having access to direct deposit forms is that you don’t have to worry about your employees misplacing their checks.
If you are using payroll software, the direct deposit feature might be built into your payroll fees, or you might need to pay extra for the feature. Alternatively, you could work directly with your bank to put through direct deposits for your employees.
Easy access to paystubs
Access to pay stubs is an important payroll function for any business, irrespective of their size.
In the US, employers are required to maintain accurate records of hours worked by employees and the wages that are paid out to them. However, as per the Fair Labour Standards Act Advisor, you are not required by law to provide your employees with a pay stub.
Canadian employers, on the other hand, are legally required to provide a pay statement, and the Canadian Payroll Association has even compiled a comprehensive document outlining all the guidelines to follow when generating a pay statement.
By ensuring your employees have access to their pay stubs – either electronically or as a hard copy, they will be able to see their net payroll amounts, total taxes that were withheld on their behalf, any reimbursements or additional deductions.
Click here to read an in-depth post on how to read a paycheck correctly, and if you have employees in Canada, here’s a link to a post that will help them know if the payroll amounts on their paycheques are correct.
Simplified year-end reporting
The last item on this list of key payroll features is year-end reporting.
Whether you hire employees or independent contractors, you are responsible for providing them with a year-end report that accurately represents their complete payroll for the year.
In the US, you have to provide your employees with a Form W-2 and your contract workers with a Form 1099. In Canada, you generate a T4 for your employees and a T4A for your independent contractors.
Ever wondered what all those amounts on the tax forms mean? Well, we’ve got you covered with two easy-to-read posts:
A Closer Look at the Amounts on the W2 and 1099 Tax Forms
A Closer Look at the Amounts on the T4 and T4A Tax Forms
If you process payroll using manual methods, you are likely to work with your accountant/bookkeeper to ensure that these tax forms are being prepared accurately. This can be a time-consuming and expensive option for a small business.
Cloud-based complete payroll solutions can simplify year-end processes because the reports can be generated automatically using information from all the payroll transactions for the year. Again, you should check if your payroll provider/software charges you extra for year-end reports.
There are other payroll functions like workers compensation or state-specific reporting, but these are the five main payroll functions for which all employers are responsible. Whether you choose to do these functions using manual methods or payroll software will depend on how much time you have to spare and how much money you want to save.
Disclaimer: The advice we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals.