Avoid Payroll Pitfalls: Common Mistakes Small Businesses Make and How to Dodge Penalties
Running payroll can be a daunting task for small businesses. Even the smallest mistake can result in costly penalties from the CRA (Canada Revenue Agency). To help business owners navigate this challenge, I’ll cover the most common payroll mistakes and break down the payroll process into four simple steps. Plus, I’ll offer tips on how to avoid payroll penalties—even if you’re handling it on your own!
1. Missing Payroll Deadlines
Missing payroll deadlines is one of the easiest ways to incur penalties. It’s important to stay on top of payment due dates for employee wages, CPP (Canada Pension Plan), EI (Employment Insurance), and income tax remittances.
Tip: Set up calendar reminders for these deadlines or automate payroll schedules with your accounting software.
2. Miscalculating Deductions
Incorrect calculations for employee deductions (such as income tax, CPP, and EI) are common errors that can trigger fines. It’s vital to ensure deductions are calculated correctly based on updated tax rates.
Tip: Always use updated tax tables and payroll software like QuickBooks or Sage to automate these calculations.
3. Misclassifying Employees
Many small businesses misclassify workers as contractors instead of employees, which can lead to audits and penalties. The CRA has strict guidelines on employee vs. contractor classification.
Tip: When in doubt, refer to the CRA’s guide or consult with a tax professional.
4. Ignoring Overtime Pay Rules
Failing to pay the correct overtime rate for hours worked beyond standard work hours can result in wage claims from employees.
Tip: Know the employment standards in your province and track hours worked accurately to ensure overtime is properly compensated.
The Payroll Process in 4 Steps
If you’re new to payroll or want to ensure you’re following the right process, here’s a breakdown in four simple steps:
Calculate Gross Wages: Start by calculating the total earnings, including hourly wages or salaries, commissions, and overtime.
Calculate Deductions: Subtract necessary deductions such as income tax, CPP, EI, and any company-specific contributions.
Remit Payroll Taxes: Submit all payroll deductions to the CRA. The frequency of remittance depends on your business size, but most small businesses remit monthly.
Prepare Records of Employment (ROE): Ensure proper documentation of payments, deductions, and any changes in employment status. ROEs must be filed when employees stop working for you.
How to Avoid Payroll Penalties in Ontario
The CRA imposes penalties for errors such as late remittances, underpayment, or failure to report. Here’s how to stay compliant:
Stay Up-to-Date with Legislation: Payroll rules can change annually, so ensure you’re aware of the latest updates.
Automate Remittances: Use payroll software to automate payments and filings to avoid missing deadlines.
Keep Accurate Records: The CRA requires that payroll records be kept for at least six years. Stay organized and ensure you can access documents when needed.
Seek Professional Help: Even if you manage payroll in-house, working with a bookkeeper for year-end reconciliation and compliance reviews can save you from potential mistakes.
Final Thoughts
Managing payroll doesn’t have to be overwhelming. With the right tools and knowledge, you can avoid the most common mistakes. If you ever feel unsure or need help, reach out to a professional. At J & J Books and Beyond, we offer payroll services to small businesses so you can focus on what matters most—growing your business!
