INTRODUCTION
Depending on how you run the payroll (e.g., payroll processing software), the steps for handling payroll may vary. For example, if companies use payroll software, the program typically does the payroll tax calculations for them. But if they do payroll manually, they need to do their own calculations.
The Process
So, what are the steps to process payroll? Generally, companies will need to follow these to process payroll:
Step #1: Collect Timecard Information
Depending on the type of business and if employees are salaried or hourly, the company may have some or all employees clock in and out and record their information on a timesheet. For hourly employees, employers need to know their hours so they can pay them properly. And they may need to do the same with salaried employees.
Before employers can calculate gross pay and payroll taxes, they must determine deductions, etc., collect timecards from applicable employees. The timecards show how many hours each employee worked, including overtime during the period.
Step #2: Compute Gross Pay
After collecting timecards from employees, each employee’s gross pay is calculated, this may or may not include any overtime wages. If a company uses payroll software, the software handles this step--including overtime calculations.
For hourly employees, gross wages by are calculated by multiplying the hourly wage by the number of hours worked in the period. For salaried employees, their gross pay is generally the same each period unless they earn overtime or other additional wages. To calculate gross wages for a salaried employee, divide their annual salary by the number of pay periods in a year (e.g., $65,000/26).
Overtime is 1.5 times an employee’s regular pay rate for each hour worked over 40 in a workweek.
Step #3 Calculate Payroll Taxes
Next step is to calculate each employee’s payroll taxes. Again, using payroll software or a tax professional can help simplify this step.
Depending on the employee’s TD1 and TP-1 information, their taxes can vary. Employers may need to withhold the following taxes:
Step #4: Determine Employees Deductions
Along with withholding taxes from the employees’ paycheques, employers may also need to subtract deductions. Employee deductions can be pre-tax or post-tax, depending on what they are. Some common deductions include:
If employees have any deductions, make sure to deduct them accordingly. Companies that use payroll software, can typically set up deductions so that they are automatically deducted each pay period.
Step #5: Calculate Net Pay
After each employee’s gross pay is calculated, payroll taxes are deducted, and allowable deductions, now the employees’ net pay can be calculated. The employees’ net pay is how much they take home after taxes and deductions.
Step #1: Collect Timecard Information
Depending on the type of business and if employees are salaried or hourly, the company may have some or all employees clock in and out and record their information on a timesheet. For hourly employees, employers need to know their hours so they can pay them properly. And they may need to do the same with salaried employees.
Before employers can calculate gross pay and payroll taxes, they must determine deductions, etc., collect timecards from applicable employees. The timecards show how many hours each employee worked, including overtime during the period.
Step #2: Compute Gross Pay
After collecting timecards from employees, each employee’s gross pay is calculated, this may or may not include any overtime wages. If a company uses payroll software, the software handles this step--including overtime calculations.
For hourly employees, gross wages by are calculated by multiplying the hourly wage by the number of hours worked in the period. For salaried employees, their gross pay is generally the same each period unless they earn overtime or other additional wages. To calculate gross wages for a salaried employee, divide their annual salary by the number of pay periods in a year (e.g., $65,000/26).
Overtime is 1.5 times an employee’s regular pay rate for each hour worked over 40 in a workweek.
Step #3 Calculate Payroll Taxes
Next step is to calculate each employee’s payroll taxes. Again, using payroll software or a tax professional can help simplify this step.
Depending on the employee’s TD1 and TP-1 information, their taxes can vary. Employers may need to withhold the following taxes:
- Federal income tax: Based on Form TD1 information
- Provincial income tax: Based on TP-1 information
Step #4: Determine Employees Deductions
Along with withholding taxes from the employees’ paycheques, employers may also need to subtract deductions. Employee deductions can be pre-tax or post-tax, depending on what they are. Some common deductions include:
- QPP
- QPIP
- EI
- RPP
- Union
- Health insurance premiums
- Life insurance premiums
If employees have any deductions, make sure to deduct them accordingly. Companies that use payroll software, can typically set up deductions so that they are automatically deducted each pay period.
Step #5: Calculate Net Pay
After each employee’s gross pay is calculated, payroll taxes are deducted, and allowable deductions, now the employees’ net pay can be calculated. The employees’ net pay is how much they take home after taxes and deductions.
To find net pay, simply deduct taxes and deductions from the employee’s gross earnings. Use the following formula:
Gross Earnings – Total Payroll Deductions (Mandatory and Voluntary = Net Pay
Step #6: Approve and Submit Payroll
Approval is the most important step when running payroll for employees. Now that the employees net earnings have been calculate. The next step is to have the payroll approved. But before this can be done it’s important to double-check the calculations to ensure that they are accurate. If a payroll software is used, verify everything one more time to ensure that the correct information was entered correctly (e.g., employee hours).
Once the employees’ timecards have been approved, it’s time run the payroll and issue payments to employees.
Approval is the most important step when running payroll for employees. Now that the employees net earnings have been calculate. The next step is to have the payroll approved. But before this can be done it’s important to double-check the calculations to ensure that they are accurate. If a payroll software is used, verify everything one more time to ensure that the correct information was entered correctly (e.g., employee hours).
Once the employees’ timecards have been approved, it’s time run the payroll and issue payments to employees.
Journalizing the Payroll
Step #7: Record The Accounting Entries
Entry #1
Entry #2
Entry #3
Entry #4
Entry #5
Entry #1
- Record the payroll summary figures from the payroll register.
- The information for the first entry is obtained from the column totals of the payroll journal.
- The total Gross Earnings figure represents the Wages (or Salaries) expense and is recorded as a debit to an expense account.
- Each of the deductions has been made from the employees’ earnings on behalf of the government or some private agency and, until remitted, represents a liability of the employer.
- Each deduction total is therefore recorded as a credit to an individual liability account.
- The Net Pay figure represents a liability to the employees and is credited to a liability account called Payroll Payable.
Entry #2
- Record the employer’s liability for Federal Employment Insurance.
- The employer must contribute 1.4 times the employee’s contributions.
Entry #3
- Record the employer’s liability for Quebec Pension Plan.
- The employer must contribute the same amount as the employees.
Entry #4
- Record the employer’s liability for RPP or RRSP, if the employer contributes.
Entry #5
- Record the employer’s liability for the Quebec Health Services Fund.
- The employer must contribute 1.65% (2.7% and 4.26%)
Step #8: Posting the Journal Entries
General Ledger
Each of the entries is posted to the appropriate general ledger accounts to update the balances.
General Ledger
Each of the entries is posted to the appropriate general ledger accounts to update the balances.
Paying The Employees
Step #9: Payment to Employees
Now comes the fun part: paying your employees. There are a variety of payment options to choose from, including:
Payment by Cash
Cr. Bank
Paying by Cheque
Regular Bank Account
Cr. Bank
Special Payroll Bank Account
Cr. Bank
This cheque is cashed, and the funds deposited in the special payroll bank account providing funds for the Payroll Department to meet the payroll obligation.
Direct Deposit
Now comes the fun part: paying your employees. There are a variety of payment options to choose from, including:
- Direct deposit
- Paycheques
Payment by Cash
- Seldom done but if done the pay envelope must be prepared with the correct amount of cash. To account for this cash taken from the bank:
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Paying by Cheque
- Most businesses pay by cheque rather than cash.
- It eliminates the problem of having large sums of money around the office.
- The cancelled cheque serves as evidence that the employees receive their pay.
- The cheque may be drawn on the company’s regular bank account or on a special payroll account.
Regular Bank Account
- A separate cheque is issued to each employee for the pay. The entry in the CP journal, is:
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Special Payroll Bank Account
- Most businesses set up a separate payroll bank account.
- This allows the payroll department to operate independently and to issue its own payroll cheques.
- One cheque only is drawn on the regular bank account for the amount of the total net pay. The entry is recorded in the Cash Payments journal:
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This cheque is cashed, and the funds deposited in the special payroll bank account providing funds for the Payroll Department to meet the payroll obligation.
- The payroll department then issues separate pay cheques to the employees.
- No accounting entries are required for these cheques.
- When all of the cheques are cashed the balance in the payroll bank account will be reduced to zero.
Direct Deposit
- The employees pay is deposited directly to their bank account.
- Employees must supply their employers with their bank address and account number.
Remittance of Deduction at Source (DAS)
Step #10: Remittance to The Federal Government
- On or before the fifteenth day of each month the employer is required to remit to the Receiver General of Canada the combined amount deducted from employees for income taxes and employment insurance, as well as its own share of employment insurance.
- Deductions made in May are due by June 15.
- A special two-part form, PD7A, is used in making the payment.
- The upper portion is submitted with the payment, the lower portion is retained by the employer for the records.
- One cheque is drawn for the combined amount. The accounting entry to record the payment is:
Dr. Employees’ Income Taxes Payable
Dr. Employment Insurance Payable (employees and employer’s)
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When this entry is posted, these liabilities of the previous month are satisfied.
Remittance of Deduction of Source (DAS)
Step #11: Payment to Provincial Government
Dr. Employees’ Income Taxes Payable
Dr. QPP Payable (employees and employer’s)
Dr. QHSF Payable
Cr. Bank
When this entry is posted, these liabilities of the previous month are satisfied.
- On or before the fifteenth day of each month the employer is required to remit to the Ministere du Revenu du Quebec the combined amount deducted from employees for income taxes and QPP, as well as its own share of QPP and QHSF.
- Deductions made in May are due by June 15.
- A special two-part form, TPZ-1015.R.14.2-V, is used in making the payment.
- The upper portion is submitted with the payment, the lower portion is retained by the employer for the records.
- One cheque is drawn for the combined amount. The accounting entry to record the payment is:
Dr. Employees’ Income Taxes Payable
Dr. QPP Payable (employees and employer’s)
Dr. QHSF Payable
Cr. Bank
When this entry is posted, these liabilities of the previous month are satisfied.
Remittance to Other Agencies
Step #12: Payments to Other Organizations
- As other liabilities resulting from payroll deductions become due, they are handled in much the same way as those owing to the government.
- A cheque is issued payable to the organization involved for the appropriate amount.
Update Payroll Records
Step #13 Update Payroll Records
Once the cheques are out the door, it is time to update the payroll records. These records must show the amounts withheld: federal and provincial income taxes, Employment Insurance, QPP, QPIP, and any other deductions from employees’ wages.
Once the cheques are out the door, it is time to update the payroll records. These records must show the amounts withheld: federal and provincial income taxes, Employment Insurance, QPP, QPIP, and any other deductions from employees’ wages.
Print Reports
Step #14: Print and Distribute Reports
Print and distribute reports needed by related departments, such as human resources and finance, for benefits administration and reconciliation purposes. If a separate department or company handles payroll taxes, forward the necessary tax records for each pay period to the appropriate individual.
Print and distribute reports needed by related departments, such as human resources and finance, for benefits administration and reconciliation purposes. If a separate department or company handles payroll taxes, forward the necessary tax records for each pay period to the appropriate individual.
Ways to Store Records
Document and Store Payroll Records
Step #15 Keep Payroll Records
To remain compliant with federal and provincial labor laws, companies need to document specific data for each pay period. Retain payroll documents—like timecards, pay stubs, and any information regarding pay increases.
Print payroll registers showing employees' gross-to-net wages for the current payroll. File in a confidential storage area. Keep these records for a minimum of three years. Keep timekeeping records and those upon which wage computations are based for a minimum of two years.
To remain compliant with federal and provincial labor laws, companies need to document specific data for each pay period. Retain payroll documents—like timecards, pay stubs, and any information regarding pay increases.
Print payroll registers showing employees' gross-to-net wages for the current payroll. File in a confidential storage area. Keep these records for a minimum of three years. Keep timekeeping records and those upon which wage computations are based for a minimum of two years.
Conclusion
Generally Accepted Accounting Principles (GAAP) are the standards and conventions used in Canada. To achieve uniformity in the financial and accounting statements GAAP favors the accrual method above the cash basis method.
Many unincorporated small businesses use the cash accounting method without problems. While looking at a financial statement or other reports, some clues indicate whether the company employs an accrual method of accounting or cash accounting method.
An accrual base balance sheet, for example, will show several accounts receivable and payable, deferred income, and prepaid expenses. A cash accounting report will not show any of these accounts, only cash and owner's capital.
Many unincorporated small businesses use the cash accounting method without problems. While looking at a financial statement or other reports, some clues indicate whether the company employs an accrual method of accounting or cash accounting method.
An accrual base balance sheet, for example, will show several accounts receivable and payable, deferred income, and prepaid expenses. A cash accounting report will not show any of these accounts, only cash and owner's capital.