WHAT IS PAYROLL ACCOUNTING?
Payroll Accounting - Definition
Payroll accounting is a process whereby the employer pays the employee for the work done. Every company hiring employees should have introduced a payroll accounting process; payroll accounting is often the biggest expense for the company. An effective and efficient payroll calculation process ensures that employees are remunerated correctly and consistently, maintains their satisfaction with this aspect of employment and allows the staff to focus on other areas.
It seems simple in its essence but is complicated by the various deductions at stake. Employers must collect taxes on each paycheck and ensure that the exact funds are paid to the appropriate government agency. Employers may also be responsible for withholding and paying insurance premiums and deposits on pension accounts or to selected charities.
Payroll processing tasks can be a huge burden and unwanted stress for small business owners and can be overwhelming for large companies. Failure to meet a deadline or fill out a tax return incorrectly can result in fines or imprisonment. To avoid these problems, small, medium, and large companies can use accounting systems.
It seems simple in its essence but is complicated by the various deductions at stake. Employers must collect taxes on each paycheck and ensure that the exact funds are paid to the appropriate government agency. Employers may also be responsible for withholding and paying insurance premiums and deposits on pension accounts or to selected charities.
Payroll processing tasks can be a huge burden and unwanted stress for small business owners and can be overwhelming for large companies. Failure to meet a deadline or fill out a tax return incorrectly can result in fines or imprisonment. To avoid these problems, small, medium, and large companies can use accounting systems.
Importance of Payroll Accounting
Payroll accounting is a critical aspect of financial management for any organization. Payroll expenses often represent a company's largest expense, and it is important to ensure that they are accurately recorded and paid on time.
Accurate payroll records are also required for both federal and state government purposes. In addition, timely and accurate payroll payments are essential for maintaining good employee morale. Employees are sensitive to payroll errors or irregularities, and it is important to ensure that they are paid correctly and on time to maintain their trust and satisfaction.
Therefore, it is important for businesses to have a well-designed payroll system in place to manage the employer-employee relationship and ensure that payroll expenses are accurately accounted for and paid on time. This system should provide adequate safeguards against unauthorized payments and misappropriation of funds and should also meet the legal requirements for payroll recordkeeping and reporting. Overall, effective payroll accounting is crucial for ensuring the financial health and success of any organization.
Accurate payroll records are also required for both federal and state government purposes. In addition, timely and accurate payroll payments are essential for maintaining good employee morale. Employees are sensitive to payroll errors or irregularities, and it is important to ensure that they are paid correctly and on time to maintain their trust and satisfaction.
Therefore, it is important for businesses to have a well-designed payroll system in place to manage the employer-employee relationship and ensure that payroll expenses are accurately accounted for and paid on time. This system should provide adequate safeguards against unauthorized payments and misappropriation of funds and should also meet the legal requirements for payroll recordkeeping and reporting. Overall, effective payroll accounting is crucial for ensuring the financial health and success of any organization.
Payroll Management: The Ultimate Guide
Payroll management encompasses the entire process of calculating employee hours, paying employees, withholding taxes, and maintaining the financial documentation for your business.
From handling sensitive employee information to calculating taxes and depositing money into the bank accounts of your employees, payroll management can be complicated and fraught with liabilities. It’s important to understand the right way to manage your payroll so you’re compliant legally.
From handling sensitive employee information to calculating taxes and depositing money into the bank accounts of your employees, payroll management can be complicated and fraught with liabilities. It’s important to understand the right way to manage your payroll so you’re compliant legally.
Why Managing Payroll Is Vital?
If companies cannot run payroll, then they cannot pay their employees. Without employees, businesses cannot function. Employees want to be paid on time and if companies cannot manage payroll efficiently, then they could lose important members of their team and even have legal difficulties.
Here are the most important reasons that you need to manage payroll properly for your business:
Legal requirements. Filing payroll taxes carries its own unique set of rules and regulations from both the federal and provincial levels. If companies do not file on time, they could be subject to hefty fines or penalties. If they make a mistake with an employee’s pay and do not fix it, again they are liable. It is vitally important to stay as compliant as possible.
Employee retention. Superstar members of a team probably are not going to stick around if their employers can’t pay them correctly or on time. Strong employees can find work elsewhere, so it’s important for companies to retain their teams and make sure their pay is always done correctly and on time.
Employee performance. Beyond just keeping employees, employers want them to perform and do a good job. Even if they are retained, failing to pay them on time or correctly can cause their performance to slip as they may become disinterested or look for new work.
Business finances. Failing to manage payroll properly can impact companies’ finances negatively. Not only could they get fined, costing them money, but they could end up thinking they have more in their bank accounts than they do, leading to bank fees or bounced cheques.
Payroll management is one of the most important administrative functions of entire and organizations. If done correctly, it will largely go unnoticed, but if done incorrectly it can make it impossible to stay in business.
Here are the most important reasons that you need to manage payroll properly for your business:
Legal requirements. Filing payroll taxes carries its own unique set of rules and regulations from both the federal and provincial levels. If companies do not file on time, they could be subject to hefty fines or penalties. If they make a mistake with an employee’s pay and do not fix it, again they are liable. It is vitally important to stay as compliant as possible.
Employee retention. Superstar members of a team probably are not going to stick around if their employers can’t pay them correctly or on time. Strong employees can find work elsewhere, so it’s important for companies to retain their teams and make sure their pay is always done correctly and on time.
Employee performance. Beyond just keeping employees, employers want them to perform and do a good job. Even if they are retained, failing to pay them on time or correctly can cause their performance to slip as they may become disinterested or look for new work.
Business finances. Failing to manage payroll properly can impact companies’ finances negatively. Not only could they get fined, costing them money, but they could end up thinking they have more in their bank accounts than they do, leading to bank fees or bounced cheques.
Payroll management is one of the most important administrative functions of entire and organizations. If done correctly, it will largely go unnoticed, but if done incorrectly it can make it impossible to stay in business.
How To Manage Payroll
Payroll management is the process of administering employees’ financial records, including salaries, benefits, taxes, and deductions. Payroll management involves calculating employees’ wages, making payments, keeping payroll records, and collecting tax forms.
Furthermore, managing payroll can be done in several different ways. The entire process involves collecting employee data and inputting it correctly into a file or document; calculate each pay cheque for every pay period, making sure taxes are calculated correctly. The last step is making sure both employees and the appropriate government agencies are paid on time correctly.
Businesses manage payroll in many ways: manually, with spreadsheets, or automatically via payroll software. Some companies outsource payroll to payroll experts like banks or professional payroll service companies.
There are three top ways to manage payroll:
1. Manual/In-house Processing
Companies calculate employees’ pay using spreadsheets and/or online payroll calculators, which determine tax withholding and other deductions. This process can easily become complex given that employees have different salaries and tax withholding preferences. This approach is also vulnerable to human error, mainly because of its complexity.
A staff member must closely track changes to tax and labor regulations to ensure employees’ pay is correctly calculated. Manually running payroll is also the slowest and most labor-intensive method, partly because of the paper trail that must be maintained to protect a company in the event of an audit.
Here are some of the drawbacks to manual processing:
2. Payroll Software
Software solutions provide freedom from some of the more grueling aspects of running payroll while allowing an employer to retain control over the process. A good payroll software solution stays current with legal requirements in every jurisdiction and saves customers time by performing tasks such as automated calculation of earnings and deductions, real-time payroll review and editing, payroll tax filings, and distribution of end-of-year tax forms.
There are many payroll software options on the market today that will handle most of the payroll process on company’s behalf. This can save time, be cost-efficient and ensure timely payments to both employees and to the various government agencies collecting payroll taxes. Here are some of the most important things that payroll software does for a company:
Payroll software can be extremely affordable. With all the time, energy and potential liability involved in payroll, this is well worth the price.
3. Outsourcing
The final option is a third-party payroll provider that handles everything for a company. Businesses can hire an external payroll company or an accountant to handle payroll. Outsourcing often means a hands-off process for a business after the initial payroll setup, although certain information, such as employee timecards, must be provided if the payroll company does not offer a time-tracking app or another way to track hours. The provider handles all payroll calculations and distributes pay cheques. The outsourcing provider is also responsible for compliance with tax and labor laws, so an employer is not held liable for penalties if pay cheques or tax filings are incorrect.
In addition, there will never a worry about adding employee information into the database or making sure the payroll is processed on time in the software because the provider will handle all of it. This is the easiest way to manage payroll because companies do not have to do anything but notify their payroll service of new employees and then make sure they have the funds in their bank account. This is the most hands-off approach, giving management time to spend on operating the business. However, costs may vary from company to company depending on the size of the payroll.
The primary drawback of this method of managing payroll is the cost, as it’s the most expensive option. There is also a lack of control in the process. Many businesses appreciate the touchpoint with their employees of managing the process and making sure they are the ones that deal with any issues that come up. Having a third-party handle that could impact your business culture in a way you may not intend.
When To Choose Payroll Management Software
Many businesses decide to process payroll manually on their own when first starting out. While this doesn’t incur third-party costs, it can be difficult as your business must keep track of many different types of employment records when you start paying employees.
Keeping track of gross pay vs. net pay, making sure each is accurate and then paying all of the taxes to the appropriate government entity is at least a full-time job all by itself. The cost of paying an employee to process this may wind up being more expensive than using another option.
Companies may opt to use payroll software or service if they are looking to save time or if they are concerned about the number of regulations that are involved with the payroll management process.
When a company has more than a few employees, the payroll process becomes very difficult to manage. Therefore, it is recommend using payroll software to process its payroll.
Furthermore, managing payroll can be done in several different ways. The entire process involves collecting employee data and inputting it correctly into a file or document; calculate each pay cheque for every pay period, making sure taxes are calculated correctly. The last step is making sure both employees and the appropriate government agencies are paid on time correctly.
Businesses manage payroll in many ways: manually, with spreadsheets, or automatically via payroll software. Some companies outsource payroll to payroll experts like banks or professional payroll service companies.
There are three top ways to manage payroll:
1. Manual/In-house Processing
Companies calculate employees’ pay using spreadsheets and/or online payroll calculators, which determine tax withholding and other deductions. This process can easily become complex given that employees have different salaries and tax withholding preferences. This approach is also vulnerable to human error, mainly because of its complexity.
A staff member must closely track changes to tax and labor regulations to ensure employees’ pay is correctly calculated. Manually running payroll is also the slowest and most labor-intensive method, partly because of the paper trail that must be maintained to protect a company in the event of an audit.
Here are some of the drawbacks to manual processing:
- Amount of information. You need to make sure you always have access to the required information on every payroll you’ve ever processed.
- Incorrect payments. The largest problem with manual payroll processing is making mistakes and giving incorrect payments to employees. This can damage employee trust and result in the loss of good employees.
- Time. Processing payroll manually can take quite a bit of time that could be better spent running or growing your business.
2. Payroll Software
Software solutions provide freedom from some of the more grueling aspects of running payroll while allowing an employer to retain control over the process. A good payroll software solution stays current with legal requirements in every jurisdiction and saves customers time by performing tasks such as automated calculation of earnings and deductions, real-time payroll review and editing, payroll tax filings, and distribution of end-of-year tax forms.
There are many payroll software options on the market today that will handle most of the payroll process on company’s behalf. This can save time, be cost-efficient and ensure timely payments to both employees and to the various government agencies collecting payroll taxes. Here are some of the most important things that payroll software does for a company:
- Calculate taxes and pay cheque amounts. Companies do not have to worry about accurate payments if they have entered the correct information at the beginning of the process. Adding the right employee information, such as whether they are paid a salary or hourly wage, combined with your pay period data will give the software what it needs to calculate all pay amounts accurately.
- Pay taxes. Payroll software companies typically will pay all payroll taxes. Companies dos not have to worry about spending tax dollars they are holding for the government. Instead, payroll software can withdraw the tax money at the same time as the employees’ pay and pay and file the taxes on time.
- Pay employees automatically. Payroll software will deposit the money into the employees’ accounts per the payment schedule that was created. All the companies have to do is process the payroll each period and the rest is done for them.
Payroll software can be extremely affordable. With all the time, energy and potential liability involved in payroll, this is well worth the price.
3. Outsourcing
The final option is a third-party payroll provider that handles everything for a company. Businesses can hire an external payroll company or an accountant to handle payroll. Outsourcing often means a hands-off process for a business after the initial payroll setup, although certain information, such as employee timecards, must be provided if the payroll company does not offer a time-tracking app or another way to track hours. The provider handles all payroll calculations and distributes pay cheques. The outsourcing provider is also responsible for compliance with tax and labor laws, so an employer is not held liable for penalties if pay cheques or tax filings are incorrect.
In addition, there will never a worry about adding employee information into the database or making sure the payroll is processed on time in the software because the provider will handle all of it. This is the easiest way to manage payroll because companies do not have to do anything but notify their payroll service of new employees and then make sure they have the funds in their bank account. This is the most hands-off approach, giving management time to spend on operating the business. However, costs may vary from company to company depending on the size of the payroll.
The primary drawback of this method of managing payroll is the cost, as it’s the most expensive option. There is also a lack of control in the process. Many businesses appreciate the touchpoint with their employees of managing the process and making sure they are the ones that deal with any issues that come up. Having a third-party handle that could impact your business culture in a way you may not intend.
When To Choose Payroll Management Software
Many businesses decide to process payroll manually on their own when first starting out. While this doesn’t incur third-party costs, it can be difficult as your business must keep track of many different types of employment records when you start paying employees.
Keeping track of gross pay vs. net pay, making sure each is accurate and then paying all of the taxes to the appropriate government entity is at least a full-time job all by itself. The cost of paying an employee to process this may wind up being more expensive than using another option.
Companies may opt to use payroll software or service if they are looking to save time or if they are concerned about the number of regulations that are involved with the payroll management process.
When a company has more than a few employees, the payroll process becomes very difficult to manage. Therefore, it is recommend using payroll software to process its payroll.
The four most common types of payrolls are:
These are also known as payroll schedules. Your cash flow rhythm, labor market expectations, and international payroll laws will impact the type of payroll schedule you follow.
- Weekly: Employees are paid on a specific day of the week, every week, throughout the year
- Bi-weekly: Employees are paid on the same day of the week every two weeks.
- Semi-monthly: Employees are paid twice a month, totaling 24 paycheques a year
- Monthly: Employees are paid once a month, usually on the last day of the month
These are also known as payroll schedules. Your cash flow rhythm, labor market expectations, and international payroll laws will impact the type of payroll schedule you follow.
Steps of the Payroll Management Process
Payroll processing involves more than disbursing money. One must prepare, process, and organize in three phases: pre-payroll, payroll processing, and post-payroll.
1. Pre-Payroll
In the pre-payroll phase, collect and verify payroll information, such as employee timesheets and taxpayer information. For each employee, input information such as:
Once this is collected and input this information; calculate and run the payroll.
2. Payroll Processing
During payroll processing, calculate employees’ gross pay (based on the number of hours worked and other bonuses, without withholding taxes). Then, you withhold (or take out) the employee’s contribution to benefits from their pay cheques. Once these deductions are made, you’ll have the worker’s net pay, which you distribute to them.
In this phase, payroll taxes and the employers fringe benefits costs are calculated.
3. Post-payroll
Post-payroll involves organization and record-keeping. During this step:
1. Pre-Payroll
In the pre-payroll phase, collect and verify payroll information, such as employee timesheets and taxpayer information. For each employee, input information such as:
- Hours worked
- Bonuses earned
- Changes in salary
- Deductions and benefits
- Changes to personal or tax information
Once this is collected and input this information; calculate and run the payroll.
2. Payroll Processing
During payroll processing, calculate employees’ gross pay (based on the number of hours worked and other bonuses, without withholding taxes). Then, you withhold (or take out) the employee’s contribution to benefits from their pay cheques. Once these deductions are made, you’ll have the worker’s net pay, which you distribute to them.
In this phase, payroll taxes and the employers fringe benefits costs are calculated.
3. Post-payroll
Post-payroll involves organization and record-keeping. During this step:
- Resolve any issues with pay slips.
- Store payroll records
- Make any changes to employee data or tax forms before you run payroll for the next pay period.
Essential Payroll System Components
Whether companies pay employees manually or by using an outsourcing service or software, they would need to create a system for managing payroll. For example, they generally need a point person within the company who’s responsible for payroll, and they need to define payroll policies and communicate them to employees.
Typical components of a company’s payroll system include:
Typical components of a company’s payroll system include:
- A payroll manager. A dedicated point of contact can help payroll run smoothly. The payroll manager is responsible for issuing paychecks and/or electronic transfers to bank accounts; summarizing earnings, taxes, deductions, leave, disability and nontaxable wages; and balancing payroll accounts.
- Payroll policy. The policy should include information on paycheck frequency, timesheet submission, over/underpayments, mandatory deductions and benefits. This helps to set expectations for employees and resolve problems.
- Payroll processing method. You’ll need to decide whether to run payroll manually or use software or an outsourcing service and figure out other day-to day aspects of payroll processing, such as how you’ll track employee time.
- Payroll register. A payroll register is an accounting summary of employee earnings and deductions for each pay period. It includes hours worked, gross pay, net pay, deductions, and payroll date. It maintains a record of payroll expenses and helps the company analyze costs.
Tasks Involved in Payroll Management
As mentioned, a company manages several payroll tasks throughout the three phases:
Employee Wage Calculation
Calculating employee wages is crucial for payroll processing, as you must ensure all employees receive the correct amount. Salaried employees will receive the same monthly paycheck, but hourly employees will receive different amounts depending on how much they work. For hourly (or non-exempt) employees, calculate and pay overtime wages.
Time and attendance software helps streamline payroll administration and calculations.
Payroll Tax Processing
Tax withholding comes right after gross pay calculations. Tax deductions include mandatory employment taxes for both federal and provincial government.
Sending Payments to Employees
After deductions, employees receive their pay via the payment method chosen by them or their employer. Payment methods include direct deposits to an employee’s bank account.
Providing Pay Stubs
Pay stubs contain information about the breakdown of employee payments. Employees need pay stubs to understand withholdings from their pay cheques and to make correct calculations when filing taxes during tax season.
Payroll Record-keeping
All employers are required to maintain accurate records of work hours an employee has worked each day. The federal government and provincial mandate that employers must retain these records for 36 months after the work is completed.
You can secure payroll records physically, but payroll management software allows you to keep documents safe and organized.
Employee Wage Calculation
Calculating employee wages is crucial for payroll processing, as you must ensure all employees receive the correct amount. Salaried employees will receive the same monthly paycheck, but hourly employees will receive different amounts depending on how much they work. For hourly (or non-exempt) employees, calculate and pay overtime wages.
Time and attendance software helps streamline payroll administration and calculations.
Payroll Tax Processing
Tax withholding comes right after gross pay calculations. Tax deductions include mandatory employment taxes for both federal and provincial government.
Sending Payments to Employees
After deductions, employees receive their pay via the payment method chosen by them or their employer. Payment methods include direct deposits to an employee’s bank account.
Providing Pay Stubs
Pay stubs contain information about the breakdown of employee payments. Employees need pay stubs to understand withholdings from their pay cheques and to make correct calculations when filing taxes during tax season.
Payroll Record-keeping
All employers are required to maintain accurate records of work hours an employee has worked each day. The federal government and provincial mandate that employers must retain these records for 36 months after the work is completed.
You can secure payroll records physically, but payroll management software allows you to keep documents safe and organized.
Tips for Efficient & Accurate Payroll Management
As a business grows, payroll tasks become more complex, repetitive, and frustrating. The sooner you set up an efficient and scalable payroll management system, the easier it will be to adapt it to its growing workforce and business needs.
1. Set aside enough time for payroll each pay period
Ensure you have enough time to review employee tax documentation, hours worked, and other information relevant to your payroll. Business owners may spend up to five hours calculating their employee wages and taxes before each payday (even more if they pay their employees weekly or biweekly).
2. Set payroll calendar alerts
Create a payroll calendar in Google Calendar to notify you a few days before important payroll dates, such as payday and tax deadlines. Set up each alert to give you enough time to complete the task. As your team grows, you can share this calendar with employees to nurture transparency and let them know when they will get paid.
3. Document payroll processes
Documenting all payroll management processes in a handbook allows you to audit processes occasionally and scan for improvements. It also makes integrating of new payroll managers easier, should you ever hand off the task.
4. Provide employee training about payroll
Payroll automation software progresses every day, and payroll staff (or you, if you run a one-person business) should keep up with the newest trends and best payroll practices. Provide employee training to enhance collaboration among team members, help them automate repetitive tasks, and broaden their knowledge about running payroll.
And if you are the only employee managing payroll, set aside time to explain how payroll works to employees and let them know the importance of submitting their hours and documents on time if they want to get paid.
5. Plan for additional payments
When setting a budget and planning payroll, do not forget about additional payments you may make, such as end-of-year bonuses.
Payroll does not only refer to salary and wages but also other types of employee compensation like commissions, bonuses, and reimbursements. Plan for these additional payments and ensure the payment date is within the current tax year so you can appropriately adjust the employee’s income tax on tax forms.
6. Update employee data regularly
Employee data—such as addresses, last names, and hourly wages—will change over time. You should schedule regular data revisions (or ask employees to check their information) to ensure everything is current.
7. Choose scalable software
Choose a payroll solution that fits your current business needs and growth aspirations.
Scalable software means you would not need to switch to a new payroll system as your team grows. Settling with one payroll solution and moving to another means new training sessions, setup, potential data security issues, and processes.
8. Ask employees for feedback
Ask employees for feedback to understand whether the payroll process is straightforward. Do not make assumptions about employees’ feelings about payroll, especially considering how frequently employees leave when they do not feel confident in their employer’s ability to pay their wages.
Asking for feedback may prompt you to provide additional training about payroll. It may also help develop new ways to optimize the payroll process.
9. Outsource payroll management services
Outsource payroll to a payroll service provider or an employer of record to save time, ensure compliance, and have one less task on your plate
The number of companies outsourcing payroll services is growing for a good reason. Outsourcing payroll costs less than hiring full-time employees to handle the process, and you usually get access to payroll management software and professional support from payroll experts.
1. Set aside enough time for payroll each pay period
Ensure you have enough time to review employee tax documentation, hours worked, and other information relevant to your payroll. Business owners may spend up to five hours calculating their employee wages and taxes before each payday (even more if they pay their employees weekly or biweekly).
2. Set payroll calendar alerts
Create a payroll calendar in Google Calendar to notify you a few days before important payroll dates, such as payday and tax deadlines. Set up each alert to give you enough time to complete the task. As your team grows, you can share this calendar with employees to nurture transparency and let them know when they will get paid.
3. Document payroll processes
Documenting all payroll management processes in a handbook allows you to audit processes occasionally and scan for improvements. It also makes integrating of new payroll managers easier, should you ever hand off the task.
4. Provide employee training about payroll
Payroll automation software progresses every day, and payroll staff (or you, if you run a one-person business) should keep up with the newest trends and best payroll practices. Provide employee training to enhance collaboration among team members, help them automate repetitive tasks, and broaden their knowledge about running payroll.
And if you are the only employee managing payroll, set aside time to explain how payroll works to employees and let them know the importance of submitting their hours and documents on time if they want to get paid.
5. Plan for additional payments
When setting a budget and planning payroll, do not forget about additional payments you may make, such as end-of-year bonuses.
Payroll does not only refer to salary and wages but also other types of employee compensation like commissions, bonuses, and reimbursements. Plan for these additional payments and ensure the payment date is within the current tax year so you can appropriately adjust the employee’s income tax on tax forms.
6. Update employee data regularly
Employee data—such as addresses, last names, and hourly wages—will change over time. You should schedule regular data revisions (or ask employees to check their information) to ensure everything is current.
7. Choose scalable software
Choose a payroll solution that fits your current business needs and growth aspirations.
Scalable software means you would not need to switch to a new payroll system as your team grows. Settling with one payroll solution and moving to another means new training sessions, setup, potential data security issues, and processes.
8. Ask employees for feedback
Ask employees for feedback to understand whether the payroll process is straightforward. Do not make assumptions about employees’ feelings about payroll, especially considering how frequently employees leave when they do not feel confident in their employer’s ability to pay their wages.
Asking for feedback may prompt you to provide additional training about payroll. It may also help develop new ways to optimize the payroll process.
9. Outsource payroll management services
Outsource payroll to a payroll service provider or an employer of record to save time, ensure compliance, and have one less task on your plate
The number of companies outsourcing payroll services is growing for a good reason. Outsourcing payroll costs less than hiring full-time employees to handle the process, and you usually get access to payroll management software and professional support from payroll experts.
How Does Payroll Processing Work?
Efficient and reliable payroll processing can be one of the most important factors toward an organization's overall success. It not only shows employees their time and work are valued but also influences their trust and engagement within the workplace more than any piece of swag they'll receive. Moreover, it can substantially help meet compliance requirements and even save the organization time and money.
So, if payroll processing is such a crucial component, how do you guarantee your organization not only gets it right the first time, but every time? Well, you can start by reading this webpage to understand fundamentals of what payroll processing is, how it works, and what documents are involved. Because when it comes to implementing dependable, streamlined payroll processing, the more information individuals have, the better off they will be.
So, if payroll processing is such a crucial component, how do you guarantee your organization not only gets it right the first time, but every time? Well, you can start by reading this webpage to understand fundamentals of what payroll processing is, how it works, and what documents are involved. Because when it comes to implementing dependable, streamlined payroll processing, the more information individuals have, the better off they will be.
How to Process Payroll
If you have never processed payroll, you might be feeling a little intimidated. But do not worry. Processing payroll is easier than you think. These steps will take you through the payroll process step by step, so you will be confident and prepared for payday.
What is Payroll Processing?
Payroll processing is the act of managing employee payments. It covers everything from inputting an employee into your payroll software to giving them their pay cheques.
In the case of small business owners, chances are good that they are the ones handling payroll. When their team gets bigger and payroll becomes more time-consuming, they might hand off this task to an accountant or Human Resources (HR) manager.
Often, business owners purchase a payroll accounting software to help with organization and ensure payroll compliance with provincial and federal laws. There are a lot of taxes to keep in mind when processing payroll, so it helps to have professional assistance.
If you are wondering how processing employees’ payroll works, there are eight basic steps from start to finish.
What is Payroll Processing?
Payroll processing is the act of managing employee payments. It covers everything from inputting an employee into your payroll software to giving them their pay cheques.
In the case of small business owners, chances are good that they are the ones handling payroll. When their team gets bigger and payroll becomes more time-consuming, they might hand off this task to an accountant or Human Resources (HR) manager.
Often, business owners purchase a payroll accounting software to help with organization and ensure payroll compliance with provincial and federal laws. There are a lot of taxes to keep in mind when processing payroll, so it helps to have professional assistance.
If you are wondering how processing employees’ payroll works, there are eight basic steps from start to finish.
Step-by-Step Guide to Processing Payroll in Canada
Processing payroll is not just about compensating employees. It is part of operating a business legally—according to provincial laws and the Federal Labour Standards. These standards and laws have several requirements that fit into a company’s payroll process—from tracking employee time at work to record keeping. You’ll want to keep those regulations in mind when establishing a payroll process.
1. Choose a payroll system
There are three basic payroll systems: manual payroll, outsourced payroll, and payroll software.
Before companies commit to one system over another, they have to consider factors like business growth, employee benefits, and the complexity of their province’s payroll laws.
2. Create a payroll policy
Before companies create a payroll policy, they have to review their local labour laws, provincial overtime laws, and federal labour laws. The most common violation is unpaid overtime, which can happen by accident when you don’t know the rules.
Here are some other things to include in the payroll policy:
3. Gather employee information
If you have employees, you should also have all their information. Employee personal information that is required for payroll includes their social insurance number (SIN), and completed Form TD1, Personal Tax Credits Return. Employers that have employees in Quebec are also required to collect provincial Form TP-1015.3-V, Source Deductions Return.
4. Set up direct deposit
Direct deposit is not free, but it is convenient for both employees and their employers, so it’s common. As a business owner, you can set up direct deposit through your business’s bank directly or your payroll service provider.
If employees have opted for direct deposit, they will have to give some information. This includes their bank’s name, their account number, their account type (chequing or savings), and their bank’s routing number. Once this is done, the next step is to transfer that information to the payroll software or bank.
5. Establish a time tracking system
It is required of employers to maintain accurate records of work hours an employee has worked each day. The federal government mandates that employers must retain these records for 36 months after the work is completed.
One way to maintain these records is to track hours manually and ask employees to write down when they clock in and out. Otherwise, you might try a time tracking software that holds on to employee timesheet records.
6. Collect employee timesheets
Congratulations—you have reached the end of the pay period! It’s time to run your first payroll, which means it is time to collect employee timecards. If they are paper timecards, you will need to spend some time adding up the hours, checking for any mistakes, and transcribing the numbers to your payroll records.
If the timecards are digital, now is the time to import them to your payroll software. Depending on the product, those timesheets may already be sitting inside your payroll software, waiting for approval.
Once you have collected the required documents, set a payroll schedule, and determine how you will manage the process, there are seven steps to processing payroll.
7. Approve and submit employee payroll
Approval is the most important step when running payroll for hourly employees. This is your chance to make sure all the hours worked make sense, so payroll is accurate. Once you have approved all employee timecards, you are ready to run payroll and issue payments to employees.
8. Report and update payroll records
Once the cheques are out the door, it is time to update your payroll records. Those records must show you have withheld federal and provincial mandatory deductions from employee wages.
1. Choose a payroll system
There are three basic payroll systems: manual payroll, outsourced payroll, and payroll software.
- Manual payroll is processed by hand, typically on paper or in a spreadsheet.
- Outsourced payroll means hiring someone else to take care of everything from payroll taxes to bookkeeping.
- Payroll software varies by plan or product. Most offer everything from basic payroll assistance to add-ons that may include time tracking or even HR services.
Before companies commit to one system over another, they have to consider factors like business growth, employee benefits, and the complexity of their province’s payroll laws.
2. Create a payroll policy
Before companies create a payroll policy, they have to review their local labour laws, provincial overtime laws, and federal labour laws. The most common violation is unpaid overtime, which can happen by accident when you don’t know the rules.
Here are some other things to include in the payroll policy:
- Pay dates, including the length of each pay period, and when you pay employees after that.
- How employees would be paid—by direct deposit or paper cheque.
- Payroll deductions and withholdings and how the benefits offered will impact the employee’s pay cheque.
3. Gather employee information
If you have employees, you should also have all their information. Employee personal information that is required for payroll includes their social insurance number (SIN), and completed Form TD1, Personal Tax Credits Return. Employers that have employees in Quebec are also required to collect provincial Form TP-1015.3-V, Source Deductions Return.
4. Set up direct deposit
Direct deposit is not free, but it is convenient for both employees and their employers, so it’s common. As a business owner, you can set up direct deposit through your business’s bank directly or your payroll service provider.
If employees have opted for direct deposit, they will have to give some information. This includes their bank’s name, their account number, their account type (chequing or savings), and their bank’s routing number. Once this is done, the next step is to transfer that information to the payroll software or bank.
5. Establish a time tracking system
It is required of employers to maintain accurate records of work hours an employee has worked each day. The federal government mandates that employers must retain these records for 36 months after the work is completed.
One way to maintain these records is to track hours manually and ask employees to write down when they clock in and out. Otherwise, you might try a time tracking software that holds on to employee timesheet records.
6. Collect employee timesheets
Congratulations—you have reached the end of the pay period! It’s time to run your first payroll, which means it is time to collect employee timecards. If they are paper timecards, you will need to spend some time adding up the hours, checking for any mistakes, and transcribing the numbers to your payroll records.
If the timecards are digital, now is the time to import them to your payroll software. Depending on the product, those timesheets may already be sitting inside your payroll software, waiting for approval.
Once you have collected the required documents, set a payroll schedule, and determine how you will manage the process, there are seven steps to processing payroll.
- Record employee hours. This can be done manually, using punch cards or with time-tracking software. Accuracy is key here.
- Calculate gross pay. For employees who are paid based on an hourly wage, add the number of hours worked in each pay period and multiply by their hourly rates. Note that overtime hours generally must be paid at time-and-a-half. For salaried employees, gross pay is calculated as the year’s salary divided by the number of pay periods.
- Determine each employee’s deductions.
- Figure out net pay and pay employees. Subtract all deductions from each employee’s gross pay to obtain net pay. Pay employees via direct deposit or cheque. Also, be sure employees can easily access a copy of their pay stubs.
- Pay payroll taxes. All federal and provincial remittances Businesses that reported $50,000 or less in tax liability for the previous four quarters can pay taxes monthly; those reporting more than $50,000 in taxes for the previous four quarters must deposit semi-weekly (twice per month) based on the day you pay employees.
- Record each pay cheque. Thorough, accurate record-keeping is a must, as mandated by the Federal and Provincial Labor Standards Act.
- Update General Ledger Accounts. Since payroll is one of the largest expenses for a company, it is important to update your general ledger accounts after each pay period to keep financial reports accurate and up-to-date.
7. Approve and submit employee payroll
Approval is the most important step when running payroll for hourly employees. This is your chance to make sure all the hours worked make sense, so payroll is accurate. Once you have approved all employee timecards, you are ready to run payroll and issue payments to employees.
8. Report and update payroll records
Once the cheques are out the door, it is time to update your payroll records. Those records must show you have withheld federal and provincial mandatory deductions from employee wages.
How Long Does it Take to Process Payroll?
Processing payroll may take several hours, depending on your number of employees and the tools you use. The more manual the process, the longer it will take.
Automated payroll and time tracking tools can reduce that time considerably. One reason is that most payroll processing solutions calculate payroll taxes for you, which could take hours if done by hand.
Once you submit payroll, the time it takes for those cheques to hit your account depends on the type of deposit. Some payroll providers offer same-day direct deposit or next-day direct deposit. In general, though, it takes about two to three days.
Automated payroll and time tracking tools can reduce that time considerably. One reason is that most payroll processing solutions calculate payroll taxes for you, which could take hours if done by hand.
Once you submit payroll, the time it takes for those cheques to hit your account depends on the type of deposit. Some payroll providers offer same-day direct deposit or next-day direct deposit. In general, though, it takes about two to three days.
Advantages & Disadvantages of In-house Payroll System
Advantages
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Disadvantages
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The benefits of having this department include:
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Payroll accounting services also have drawbacks. Let us have a look at a few of them:
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Maintaining or creating a payroll management system for the first time in Canada consist of these steps:
- Apply for an employer identification number (EIN)A BN, which can be obtained from the Canada Revenue Agency (CRA), is necessary to file payroll taxes. Employers may also need to apply for provincial identification numbers, and Workers Compensation numbers for each province and territory they operate in.
- Gather employee tax documents: Form TD1, or TD1X form (commissioned employees), Federal TD1-WS along with provincial claim forms and worksheets such as Quebec TP-1015.3-V, and TD1ONvare required to help employers calculate employee payroll tax deductions.
- Determine a payroll schedule: Common pay periods are weekly, bi-weekly and semi-monthly.
- Document terms of compensation: Have clearly written policies explaining company requirements and laws for hours worked, overtime, paid time off, etc. In addition, it’s necessary to obtain each employee’s written consent for benefit contributions and other voluntary payroll deductions, as well as certain wage payment methods, like direct deposit versus pay cheque.
- Choose a method for processing payroll: Businesses can manage payroll in-house or choose to outsource the process to a payroll service provider for optimal time savings and compliance support.
- Open a bank account for payroll: Separate payroll accounts often lead to better management of funds, easier reconciliation and more accurate payroll transaction records:
- Make deductions from employee’s: Rremit them and report them on a T4/T4A information return on or before the last day of February of the following calendar year
In Quebec employers, are required to make deductions on a regular basis from the salaries or wages they pay their employees. They must also remit certain employer contributions to Revenu Québec.
Employers’ responsibilities to Revenu Québec are as follows:
Employers’ responsibilities to Revenu Québec are as follows:
- Must withhold Québec income tax, Québec Pension Plan (QPP) contributions and Québec Parental Insurance
- Plan premiums in respect of the salaries or wages you pay and the other benefits you grant to your employees.
- Must ask each employee to complete the Source Deductions Return (TP-1015.3-V).
- As a rule, source deductions and employer contributions must be remitted to Revenu Québec on a monthly basis.
- Must send them to a Revenu Québec office or to your financial institution, along with the form Remittance of Source Deductions and Employer Contributions (TPZ-1015.R.14-V), by the 15th day of the month following the month for which the remittance is made.
- RL-1 slips and Summary of Source Deductions and Employer Contributions (RLZ-1.S-V) for a given calendar year must be filed no later than the last day of February of the following year. For more information, refer to theGuide for Employers – Source Deductions and Contributions (TP-1015.G-V).
- Must file a duly completed and signed copy of the form Remittance of Source Deductions and Employer Contributions (TPZ-1015.R.14-V), even if they have no remittance to make. If this is the case, enter 0 in the box, “Amount payable.”
- Can file and transmit their source deductions and employer contributions returns, RL-1 slips and Summary of Source Deductions and Employer Contributions electronically using the Clic Revenu online services.
- Can register for Clic Revenu by visiting the Revenu Québec website at www.revenuquebec.ca.
- Register with the Commission des normes du travail, de l’équité, de la santé et de la sécurité du travail (CNESST)
What Are Remittances?
Once you’ve made the source deductions, the remaining amount is considered a remittance that you must pay (i.e., “remit”) to the CRA Typically, any amount of money transferred from one party to another in the form of an invoice, bill, or any other purpose is a remittance.
Remitting Payroll Deductions
After employers write employees’ cheques, they need to remit the payroll deductions they have withheld by the 15th of the following month. For instance, if they pay your employees in April, they must remit the deductions by May 15th. It is crucial for employers to meet the specific remittance deadlines each year, including income taxes, CPP contributions and EI premiums. If you don’t remit your source deductions on time, you could incur penalties from the CRA.
How can employers Remit Payroll Deductions to the CRA?
Employers can remit their payroll deductions to the Canada Revenue Agency by way of mail or online. My Business Account is the CRA portal where businesses can register and file their source deductions online.
Employers must meet specific remittance deadlines each year. Suppose they do not remit their source deductions on time, including income taxes, Canada Pension Plan contributions, and Employment Insurance Premiums. In that case, the CRA can incur penalties against you.
Remitting Payroll Deductions
After employers write employees’ cheques, they need to remit the payroll deductions they have withheld by the 15th of the following month. For instance, if they pay your employees in April, they must remit the deductions by May 15th. It is crucial for employers to meet the specific remittance deadlines each year, including income taxes, CPP contributions and EI premiums. If you don’t remit your source deductions on time, you could incur penalties from the CRA.
How can employers Remit Payroll Deductions to the CRA?
Employers can remit their payroll deductions to the Canada Revenue Agency by way of mail or online. My Business Account is the CRA portal where businesses can register and file their source deductions online.
Employers must meet specific remittance deadlines each year. Suppose they do not remit their source deductions on time, including income taxes, Canada Pension Plan contributions, and Employment Insurance Premiums. In that case, the CRA can incur penalties against you.
If a business were to inaccurately file their taxes or file them late, they could incur fines from the CRA. The penalties for late or non payments include:
- 3% if payment is one to three days late.
- 5% if payment is four to five days late.
- 7% if payment is six to seven days late.
- 10% if payment is more than seven days late, or no amount is paid at all.
- 20% for recurring penalties in one calendar year.
An employer or payer that fails to pay or remit an amount deducted or withheld under a tax law by the legal deadline is liable to a penalty of:
- 7% of the amount, if the payment or remittance is no more than 7 days late.
- 11% of the amount, if the payment or remittance is 8 to 14 days late.
- 15% of the amount, if the payment or remittance is more than 14 days late..
Ontario Payroll Accountant Sentenced For Fraud Charges
Cheryl MacLeod, of Hamilton, Ont., was convicted and sentenced on fraud, uttering forged documents and theft charges in relation to her role as owner and director of CTC Payroll Services. She claimed to be a payroll expert with over 25 years’ experience and operated CTC Payroll Services from 2001 to 2010.
While MacLeod ran her payroll services company, she also owned operated a Molly Maid franchise (which operated out of the basement in the same building CTC was located at 664 Fennell Ave E in Hamilton), a business known as Forever Young Spa and another business known as Chery Lynn International.
Police alleged that MacLoed had taken more money from clients than was required by the Minister of Finance for Employer Health Tax (EHT), submitted the correct amount and kept the extra funds. She was also accused of withdrawing money from client accounts and then failing to remit it to the Canada Revenue Agency and with sending forged bank documents to a client in an attempt to conceal the failure to remit funds to CRA.
According to court documents, the total loss on all of the charges was about $370,000.
During the trial in October 2017, Macleod testified that she agreed with the Crown’s assertion that the clients suffered losses but she denied defrauding them. The main question the judge addressed at trial was whether MacLeod had caused the losses and/or whether she had intended to defraud them.
JUDGE ANALYSIS
The trial judge, Justice Catrina D. Braid, found MacLoed to be “confrontational” and that her evidence to be “self-serving, confusing and often made no sense.”
“Whenever she found an opportunity, Ms. MacLeod would boast about CTC’s excellent reputation, which she says gave the company more authority and permitted CTC to do things that no other business would ordinarily be allowed to do. This included unorthodox banking practices at CIBC and special arrangements with CRA,” she said. “I find that Ms. MacLeod deliberately avoided answering inquiries from clients regarding missing funds in order to conceal the fraud.”
Ultimately, the judge declared that she was convinced beyond a reasonable doubt that MacLeod was guilty of all charges, stating, “Ms. MacLeod took advantage of her role as owner of CTC to intentionally defraud clients of funds that were provided to CTC in trust. She then took steps to conceal the fraud and theft of those funds.”
THE SENTENCE
MacLeod reappeared in court on April 3, 2018, for sentencing. MacLeod asserted her innocence. This, Justice Braid said, would make it “difficult to find that she would be a suitable candidate for rehabilitation.” She also noted MacLeod suffered from mental health issues but that this did “not appear to impact her ability to work” and that there was no evidence that it “contributed to the offences or resulted in poor judgment being used.”
MacLeod was sentenced to three years for the four counts of fraud, three years for the use of forged documents and two years for the two remaining counts of fraud. The judge ruled that all of these would be served concurrently. She called for MacLeod’s mental state to be assessed immediately to provide her with the appropriate medical care while she was in custody.
Justice Braid also ordered MacLeod pay restitution in the amount of $366,056.21. She said she was satisfied that these funds were no longer in her possession so a fine in the same amount would be issued instead of its forfeiture. She was given five years after release from custody to pay the fine.
ENFORCING RESTITUTION ORDERS
Norman Groot, a lawyer with the fraud recovery law firm Investigation Counsel PC, has advised CFN that often in criminal cases involving fraud, guilty parties are only required to serve one-sixth of their sentence before seeking parole. It is likely that MacLeod has been released. Her whereabouts are currently unknown.
Groot also advised that the Crown and the police do not enforce restitution orders, and that criminal restitution orders have to be registered as civil judgments if victims hope to receive any meaningful recovery for their loss. Unfortunately the victims of fraud are required to put “good money after bad” to monitor and investigate rogues to determine whether a recovery can be made.
COMPANIES DEFRAUDED
According to Court records, in 2009, CTC sold its client list to ADP Payroll with the plan to cease business practices by Dec. 31, 2009. This resulted in a number of companies finding imbalances, for which they enquired MacLeod about — often without adequate responses from CTC. Two examples of those defrauded included:
While MacLeod ran her payroll services company, she also owned operated a Molly Maid franchise (which operated out of the basement in the same building CTC was located at 664 Fennell Ave E in Hamilton), a business known as Forever Young Spa and another business known as Chery Lynn International.
Police alleged that MacLoed had taken more money from clients than was required by the Minister of Finance for Employer Health Tax (EHT), submitted the correct amount and kept the extra funds. She was also accused of withdrawing money from client accounts and then failing to remit it to the Canada Revenue Agency and with sending forged bank documents to a client in an attempt to conceal the failure to remit funds to CRA.
According to court documents, the total loss on all of the charges was about $370,000.
During the trial in October 2017, Macleod testified that she agreed with the Crown’s assertion that the clients suffered losses but she denied defrauding them. The main question the judge addressed at trial was whether MacLeod had caused the losses and/or whether she had intended to defraud them.
JUDGE ANALYSIS
The trial judge, Justice Catrina D. Braid, found MacLoed to be “confrontational” and that her evidence to be “self-serving, confusing and often made no sense.”
“Whenever she found an opportunity, Ms. MacLeod would boast about CTC’s excellent reputation, which she says gave the company more authority and permitted CTC to do things that no other business would ordinarily be allowed to do. This included unorthodox banking practices at CIBC and special arrangements with CRA,” she said. “I find that Ms. MacLeod deliberately avoided answering inquiries from clients regarding missing funds in order to conceal the fraud.”
Ultimately, the judge declared that she was convinced beyond a reasonable doubt that MacLeod was guilty of all charges, stating, “Ms. MacLeod took advantage of her role as owner of CTC to intentionally defraud clients of funds that were provided to CTC in trust. She then took steps to conceal the fraud and theft of those funds.”
THE SENTENCE
MacLeod reappeared in court on April 3, 2018, for sentencing. MacLeod asserted her innocence. This, Justice Braid said, would make it “difficult to find that she would be a suitable candidate for rehabilitation.” She also noted MacLeod suffered from mental health issues but that this did “not appear to impact her ability to work” and that there was no evidence that it “contributed to the offences or resulted in poor judgment being used.”
MacLeod was sentenced to three years for the four counts of fraud, three years for the use of forged documents and two years for the two remaining counts of fraud. The judge ruled that all of these would be served concurrently. She called for MacLeod’s mental state to be assessed immediately to provide her with the appropriate medical care while she was in custody.
Justice Braid also ordered MacLeod pay restitution in the amount of $366,056.21. She said she was satisfied that these funds were no longer in her possession so a fine in the same amount would be issued instead of its forfeiture. She was given five years after release from custody to pay the fine.
ENFORCING RESTITUTION ORDERS
Norman Groot, a lawyer with the fraud recovery law firm Investigation Counsel PC, has advised CFN that often in criminal cases involving fraud, guilty parties are only required to serve one-sixth of their sentence before seeking parole. It is likely that MacLeod has been released. Her whereabouts are currently unknown.
Groot also advised that the Crown and the police do not enforce restitution orders, and that criminal restitution orders have to be registered as civil judgments if victims hope to receive any meaningful recovery for their loss. Unfortunately the victims of fraud are required to put “good money after bad” to monitor and investigate rogues to determine whether a recovery can be made.
COMPANIES DEFRAUDED
According to Court records, in 2009, CTC sold its client list to ADP Payroll with the plan to cease business practices by Dec. 31, 2009. This resulted in a number of companies finding imbalances, for which they enquired MacLeod about — often without adequate responses from CTC. Two examples of those defrauded included:
- A.J. Clarke and Associates – who had contracted CTC to do their payroll services but when they transitioned to a new payroll administrator in June 2009, they discovered CTC had been over-deducting Employer Health Taxes since 2001 with a total loss of A.J. Clarke of $60,360.72.
- Voith Paper – in December 2008, the company decided to close its Hamilton plant, resulting in 58 employees being laid off and receiving lump sum severance payments. A total of $979,299.00 was transferred from the Voith Paper to CTC’s trust account. CTC deducted funds from Voith’s account and then failed to remit those funds to CRA. Voith reported total losses of $263,674.23.