There comes a time for many small business owners when they decide that they need to hire employees. This is usually an excellent sign as it means a) the business is growing and b) the small business owner has learned to delegate. It also means that additional paperwork needs to be filled out and additional taxes need to be paid. The simplest option when deciding to augment your workforce is to have the new worker invoice the business, based on hours worked or some other formula. Unfortunately, there are very specific rules as to who qualifies as a self employed contractor. Essentially, if your worker is working full time, has little flexibility and you provide the tools, then the tax authorities will classify them as an employee. In this case, you must take your new worker on as an employee, register for payroll, pay them a salary and submit regular, periodic payroll reports and payments to the Canada Revenue Agency (CRA). As usual, if you live in Quebec, you must submit to Revenue Quebec (MRQ) as well. The registration procedure is discussed below:
Registering a Payroll Account:
Employers must register for a payroll account before the “first remittance due date”. The remittance due date is on the 15th of the month following the month in which you first pay your employee.
Whether you are a sole proprietorship, partnership or corporation, you will first have to ensure that you have a business number. If you do not have a business number, you will have to fill the out the Request for a business number form. This form also allows you to register for payroll at the same time, which is included in Part C. The form requires you to indicate how many employees you intend to have over the next 12 months, how often you will pay them and a few other questions relating to the business itself. If you are not sure, use your best estimate.
If you already have a business number you will need to fill out the payroll deductions form where you must include your Business Number, your business activity and other information per the form above.
If you operate a business in Quebec you are required to register both federally (see above) and in Quebec. The application for registration, form LM-1-V will need to be filled out only for the sections that you are applying. You will need to enter your Quebec Enterprise Number (NEQ) and your Business Number obtained from the CRA.
Remittance to Revenue Canada and Revenue Quebec:
After registering for a payroll account, you are required to make remittances to the CRA on a monthly basis. The remittance forms are mailed to employers and can be filled out manually. Alternatively, remittances to the CRA can be made through participating financial institutions or third parties.
Amounts to be deducted and remitted to the CRA include Employment Insurance (EI), Canada Pension Plan (CPP)and Federal Income Taxes. Note that the EI and QPP both include an employer contribution.
Remittances are due by the 15th of the month following the month in which the employee was paid. Failure to file the source deductions return and make payment will result penalties as follows:
- 3% if the amount is one to three days late;
- 5% if it is four or five days late;
- 7% if it is six or seven days late; and
- 10% if it is more than seven days late or if no amount is remitted.
Interest will also be charged on late payments.
There are a variety of other penalties that may apply.
Similarly, Revenue Quebec will send you remittance forms which will need to filled out and submitted. They will also advise you of your filing frequency.
Amounts to be remitted to Revenue Quebec include Quebec Pension Plan (QPP), Quebec Parental Insurance Plan (QPIP), Quebec Health Services Fund (QHSF) and Quebec Income Taxes. Quebec employers are also required to pay CSST and CNT. Note that QPP and QPIP include an employer portion, while QHSF, CSST and CNT are all payable 100% by the employer.
Revenue Quebec has a comprehensive guide on source deductions and contributions