6 Payroll Mistakes Small Businesses Can Avoid

An image of a small business owner handing over a cheque to their employee

Imagine delays in salary credit or receiving a lesser amount. One small mistake in salaries and your entire week/month goes for a toss. Work can be frustrating and demotivating when salary is not credited in a timely. As difficult as it is for employees, it is even more difficult for the small business owner to make it happen. Payroll is a daunting task that takes note of every hour, every benefit, every document, and labour and tax rules. The more employees you have, the bigger the challenge. Mistakes are bound to happen.

Why Do Small Businesses Need a Payroll System?

While making mistakes is a part of learning, repeating them is chaos. If you do not set up an efficient and workable payroll system, payroll could be an administrative and financial nightmare at the end of the year. The kind of workload payroll involves, you might need a dedicated person so that you can take time to do other tasks of a business owner like building client relations, product development, marketing and operations.

Payroll software automates most tasks, such as recording attendance, hours worked, employee data, and specific deductions or benefits. Spending time setting up a system can go a long way to the smooth functioning of the business.

Common Payroll Mistakes

Small business owners can start by addressing the gaps and common mistakes in payroll that can be easily avoided through a system.

Wrongly Classify Contractors as Employees

As a business owner, you work with employees and outsource some work to contractors and freelancers. Classifying an employee as a contractor or vice versa is a common mistake. Maybe they have the same name, or there is a data entry error. This small mistake could have huge repercussions as contractors are not entitled to Canada Pension Plan (CPP) or Employment Insurance (EI) deductions. Their tax return slips are also different.

This mistake can easily be detected as the payment might differ, and the employee/contractor may contact you if the amount paid is less. Even if the mistake goes unnoticed, it will come into the limelight when you distribute T4 Slips to employees. You could encourage employees and contractors to regularly verify their profile details, such as name, contact details, address, bank details, employment status, and salary breakup. It can be done through software, and your employee data is updated.

Tracking Work Hours and Leaves

Once you have all employee details categorized accurately, the next thing is to ensure you log the working hours, leaves, holidays, and overtime correctly. A physical log sheet is inefficient. Data can be easily manipulated, and you must manually calculate the pay.

Investing in reliable time tracking and payroll software can pay off big time as it logs everything in real time. You can also edit the pay and benefits of an employee on the software, and it will automatically calculate the amount. The output is as good as the input. Ensure you do regular audits to ensure the records are accurate and updated. You can train your employees on using software to avoid data entry errors.

Failing To Communicate Details of Pay and Benefits

Apart from dividends, bonuses, and salaries, things can get complicated if you give your employees other benefits such as loans, subsidized housing, travel and business expense reimbursements. Firstly, you must draw transparent payroll policies with clear communication of benefits and deductions. Next, you must educate your employees about these benefits and any changes by providing written material for reference and conducting refresher workshops.

Benefits is the most common place where errors occur, and the CRA will likely look at this if you face an audit. If you have a large workforce, you could conduct an external audit every few years to identify any gaps in these payments.

Calculating Paycheck Deductions

Getting the amount right is half the battle won. Now comes the tough part—deductions. The CRA keeps updating the CPP and EI and withholding tax benefits. The rules around overtime, working hours, and minimum wages keep changing. Small business owners have to stay updated with regulatory and tax changes pertaining to their business to avoid CRA penalties and interest.

You could subscribe to industry and tax newsletters to stay updated. It is better to seek professional help as they are updated with changes in laws, and it is their full-time job to do the calculations and documentation.

Delays in Remittances

As an employer, the onus is on you to deduct tax and CPP from an employee’s salary and remit it to the CRA. You also have to give T4 slips to employees on time. Any delays in remittance could attract penalties between 3% and 10%, which could go up to 20% in case of repeated delays.

You can schedule your calendar, set an alarm, or outsource the payroll. A professional bookkeeper will ensure you meet all deadlines.

Not Maintaining Accurate Records

Lastly, calculations alone are not enough. The CRA requires businesses to maintain complete records of their employees and business transactions as documentary evidence. These records have to be maintained for seven years. Having disorganized payroll records could increase the risk of penalties and prosecution.

Payroll can be intimidating and time-consuming. A professional bookkeeper is skilled in organizing and handling records and documents. Bringing in a professional early can prevent you from major penalties.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Your Payroll Process

A skilled bookkeeper can help you set up a payroll system. They can guide you in maintaining payroll records and set up an efficient process to minimize payroll mistakes and smoothen this daunting task. To learn how Edelkoort Smethurst CPAs LLP can provide you with payroll and bookkeeping services, contact us online by telephone at 905-517-2297.