Expanding your small business by hiring your first employees is an exciting time. But once you have employees, the Canada Revenue Agency (CRA) has expectations. Here is what you need to know.
- There is a difference between hiring an employee and engaging an independent contractor. Contractors are considered self-employed and invoice the business for their time. They do not have the same rights as employees and are responsible for paying both the employer and employee portion of their Canada Pension Plan (CPP) premiums.
- Independent contractors usually offer a little more flexibility for business owners if they are not yet ready to hire a full-time person. But if you think you can avoid your employer obligations by simply designating people as contract workers rather than employees, this is not the case. The CRA has rules to determine if someone is an employee, even if you have decided not to put the person on the payroll. Contractors should be able to set their own hours and be able to take on other work from other businesses.
- If you pay salaries, wages, bonuses, vacation pay or tips to your employees, you would be considered an employer by the CRA. You will need to register for a payroll program account attached to your business number. And you will have all the associated obligations, such as maternity leave and sick leave guidelines.
- Your employees will need to complete Federal and Provincial TD1 Forms when they start and provide their birthdate and Social Insurance Number (SIN). This form can be found on the CRA’s website and provides the basis for calculating the amount of tax to be withheld from each employee’s paycheque. You are required to retain source deductions and remit them to the CRA every month. Source deductions include federal tax, Canada Pension Plan contributions and Employment Insurance (EI) premiums. Also, an employer’s share of CPP and EI must be remitted at the same time.
- Once you register, the CRA should send you a remittance form for a monthly or quarterly remittance. Even if you do not have a standard remittance form, you are required to make your first payment on time. You need to include a letter that says you are a new remitter, the period your payment covers, your complete business address details and your account number. CRA needs to be advised if you do not have any source deductions to remit, as in the case of part-time employees.
- Failure to remit your payroll by the due date each month will result in penalties. The amount varies depending on the amount of your payroll. Since you are remitting deductions for your employees, you are required to provide T4 slips by the end of February of the following year. Again, failure to meet the T4 deadline will also result in penalties.
- You are also required to keep records for all employees, including the time worked and all information slips you filed for them.
- If an employee leaves or is laid off, you also have obligations. You need to prepare a Record of Employment (ROE). This is used to determine whether the employee is entitled to EI benefits, so you must provide this document electronically within five calendar days after the last day worked. You can also issue a T4 slip immediately or wait until the last day of February of the following year. You are not required to provide the T4 slip early.
- Make sure you put the job contract in writing and have a written employee manual or policy in place before hiring any employees.
The need to hire employees is a good sign: it means your business is growing. Along with that growth comes a little extra paperwork, but hopefully the expanded business opportunities will more than compensate for that.