How do I pay my employees?
Once your business grows, you will start to get hired help. You have three ways you can pay the people that work with you.
Payroll Employees
Employees are those that work with you on a regular basis. You set their hours. You provide their equipment. You promise them regularly scheduled work. They are doing work that is a normal function of your business.
If you have employees, then you need to have a payroll account with the Canada Revenue Agency. You will deduct Canada Pension Plan and Employment Insurance and tax from their paycheques and submit these to Canada Revenue Agency. The “usual” remittance period is monthly, due by the 15th of each month.
There are variations, depending on the value of your payroll. Penalties for non-timely payment of payroll can be very high, up to 20% of the value you owe Canada Revenue Agency.
Note that you, as the business owner, may be considered an employee. If you are paying yourself monthly, and you anticipate a T4 at the end of the year, then you need to pay the remittance to Canada Revenue Agency on a monthly basis.
A regular payroll employee may be yourself, the business owner! Yes, you can take dividends (as many do), but there are conditions that must exist for you to do so. If you are not entitled to take dividends, and you do not pay yourself regular monthly payroll, you may incur interest and penalties without realizing it.
You as a business will pay additional CPP (Canada Pension Plan) and EI (Employment Insurance) premiums for each employee. Currently, CPP is matched “dollar for dollar”, and EI is a premium rate of approximately 1.4%.
Subcontractors
Subcontractors do not fit within the payroll employee model. This normally do work for your business that is short term or project related. They will more often than not provide their own equipment. They can set their own hours. You should have a written contract with them, clearly stipulating that they are responsible for their own business fees, such as taxes, WCB, etc.
You cannot “choose” to pay someone as a subcontractor to save tax money. They must fit the description of a subcontractor.
Dividends:
The third way to take money out of your company is through dividends. Dividends is paying a % of the profits out to the shareholders. In order to receive dividends, you need to be profitable, and you need to own shares in the company.