When building a business, founders have a lot to worry about. From developing their product and finding customers to eventually hiring great people around them and building a team. When you find someone great that you want to hire, one of the first practical questions that comes up is: how do we pay them?
There are many different approaches a company can take to paying its team, but the reality is that we see companies get payroll wrong all the time, and for a variety of reasons. Sometimes it’s something relatively minor, like an incorrect vacation balance. Other times it’s a missed payroll, late CRA remittances or realizing that an employee who left the company months ago is still being paid.
With a solid foundation and good processes, most of these issues are avoidable. Payroll doesn’t need to be overly complicated, but there are a few things every company should consider when setting it up and managing it as they grow. Getting the basics right from the outset can save a lot of headaches down the road.
Employee or Contractor – Know the Difference
Should I hire a person as an employee or as a contractor?
It’s a question we hear all the time, particularly as companies start hiring remotely. For many companies, especially when they’re starting out, contractors can seem like the easier option. There’s no payroll to set up, no employer payroll costs and generally less administration.
But you can’t simply decide that someone is a contractor because it’s easier or because that’s what both sides prefer. The actual working relationship matters. There are a number of factors that the CRA and courts look at when determining whether someone is an employee or contractor, including:
- Control: Who directs how, when, and where the work gets done?
- Chance of profit / risk of loss: Can the individual make more money by working efficiently, or managing their own costs, and can they actually lose money on a bad job?
- Nature and duration of the relationship: Is the arrangement indefinite or tied to a specific project? Is the work core to what the business does, and are benefits like vacation or insurance being provided?
- Ability to subcontract or delegate: Can the worker send someone else to do the job, hire their own help, or take on other clients at the same time?
Getting this wrong can be expensive. If someone you’ve treated as a contractor is later determined to have actually been an employee, you could find yourself responsible for payroll taxes and contributions that should have been withheld, along with interest, penalties and potentially employment-related obligations.
If someone is an employee, you’re responsible for payroll deductions, employer contributions and the employment requirements that apply where that person works. Getting the classification right from the outset can save you from significant costs and headaches down the road.
Setting Up Payroll – Getting the Foundation Right
Before you pay your first employee, there are a few things you need to get in place.
- Payroll Registration
In Canada, you’ll need a CRA payroll account to remit payroll deductions and employer contributions. Depending on where your employees are located, there may also be provincial registrations and requirements such as WSIB/WCB or employer health taxes.
- Implement a Payroll System
You’ll need to implement a payroll system. Technically, you could calculate payroll manually using the CRA site, or other methods, and track everything in excel but this is very error prone and we’ve seen it cause numerous issues, so we definitely wouldn’t recommend it. There are many good payroll systems out there such as Wagepoint, Rippling, Payworks, Quickbooks Payroll, Dayforce and ADP.
Some of the considerations when selecting your payroll system are:
-
- Cost: Understand your costs based on current and expected headcount.
- Ease of use: How intuitive is the system?
- Remittances: Understand whether the provider will calculate and remit payroll deductions to the CRA. This is a big one, as we’ve seen many companies who believe that remittances are being made to the CRA only to find out that the payroll provider calculated and deducted the required amount (which is great) but didn’t actually remit it to the CRA (which is not so great), resulting in the company having to pay interest and penalties.
- Vacation and time-off tracking: Make sure the system can track vacation earned, taken and outstanding.
- Integrations: Can it integrate with your accounting and HR systems?
- Set Up Your Employees
You’ll need some basic information from each employee, including their SIN, banking information, address and completed federal and provincial TD1 forms. You’ll also need to enter their compensation, vacation entitlement and any benefits or other deductions into the payroll system.
- Determine Your Pay Frequency
Decide how often you’ll pay employees – weekly, biweekly, semi-monthly or monthly. More frequent payroll can be better for employees, but it also means more payroll runs, more frequent cash requirements and more opportunities for errors.
We normally recommend semi-monthly payroll where possible. It still provides employees with a frequent pay schedule while giving the company more predictable monthly cash outflows and easier administration. For example, with biweekly payroll, you’ll have two months each year with three pay periods, whereas semi-monthly payroll consistently has two pay periods each month.
Have a Payroll Process
This is probably the biggest issue we see with companies. I’ve spoken to numerous founders who say something along the lines of, “Our payroll gets done, but sometimes we forget to run it and people get paid a few days late…we always pay them though.”
A missed payroll isn’t like paying a supplier a few days late. Employees have mortgages, rent and automatic payments coming out of their accounts. Missing payroll, even once, can very quickly damage employees’ confidence in the company.
You don’t need an overly complicated payroll process, but you do need some structure around it. Have a payroll calendar that clearly identifies when payroll needs to be submitted, when employees will be paid and when the cash needs to be available.
Make sure you also understand your payroll provider’s processing times, as many providers require you to submit payroll several days before the actual pay date. They may also withdraw the funds from your bank account a few days before employees are paid, so make sure you understand these dates and incorporate them into your cash planning.
Vacation is another area that needs a process around it. Make sure you have a consistent way to track vacation earned, taken and outstanding, whether that’s through your payroll system, HR system or another tool. We’ve seen companies try to piece together vacation balances from spreadsheets, emails and calendars, which can create problems when someone leaves and you need to determine what they’re actually owed.
Set a cut-off for any payroll changes, including new hires, salary changes, bonuses, commissions and terminations. New hires need to be set up before their first pay, and when someone leaves, make sure their final pay, outstanding vacation and any other amounts owing are properly accounted for and that they are removed from future payroll runs. Have someone review the payroll before it’s submitted as even a quick review can catch mistakes before they become bigger issues.
At the end of the day, payroll doesn’t need to be complicated. Getting the right foundation and processes in place can help avoid missed payrolls, penalties, unnecessary clean-up and, most importantly, unhappy employees.
If you’re setting up payroll for the first time, struggling with your current process or simply want to make sure you’re doing things properly, BrightIron can help. We work with growing companies to set up and manage payroll so they can focus on running their business rather than worrying about whether everyone is going to get paid properly and on time. Reach out to us to learn more.
