Hiring your first employee: what changes in your books

Employee or contractor?

Start by confirming the person is an employee. Calling someone a contractor does not make them one. The CRA and Revenu Québec decide on the facts of the working relationship, such as who controls the work, who supplies the tools and who carries the financial risk. If you are unsure, ask your accountant before the first payment, because correcting it later means catching up on deductions that were never withheld.

Register before the first payday

A payroll program account is added to your business number. It ends in RP followed by four digits, and the CRA uses it for every remittance and every T4 slip. Open it before you pay anyone.

In Quebec there is a second registration. Employers register with Revenu Québec for source deductions and employer contributions, and receive a separate file number. Both accounts are needed: the CRA handles some amounts and Revenu Québec handles others.

You will also need to register with the workers’ compensation board for your province: the CNESST in Quebec, the WSIB in Ontario, or the provincial board elsewhere. Premiums are based on your payroll and the kind of work your employees do.

What comes off each pay

These are source deductions. You hold them on the employee’s behalf and send them on.

• Pension contributions: the Canada Pension Plan (CPP), or the Quebec Pension Plan (QPP) for employees in Quebec.
• Employment Insurance (EI) premiums. Quebec employees pay a reduced EI rate, because Quebec runs its own parental insurance plan.
• Quebec Parental Insurance Plan (QPIP) premiums, in Quebec only.
• Federal income tax.
• In Quebec, provincial income tax, withheld separately and sent to Revenu Québec. Outside Quebec, provincial tax is withheld together with federal tax and sent to the CRA.

Rates and yearly maximums change every January. The CRA and Revenu Québec publish the current figures, and payroll software applies them for you.

What the business pays on top

Wages are not the whole cost of an employee. The business also pays its own contributions, which are an expense and are never taken from the employee’s pay.

• The employer’s share of CPP or QPP, which matches the employee’s contribution.
• The employer’s EI premium, which is 1.4 times the employee’s premium.
• The employer’s share of QPIP, in Quebec.
• In Quebec, the contribution to the Health Services Fund (FSS).
• In Quebec, the labour standards contribution to the CNT.
• Workers’ compensation premiums, to the CNESST, the WSIB or your provincial board.

Quebec employers whose total payroll goes above a set threshold also have a workforce skills development obligation, often called the 1% training rule. Most first-time employers are well below it, but it is worth knowing it exists as the team grows.

Remitting on time

Deductions and contributions are sent to the CRA and, in Quebec, to Revenu Québec, on the schedule each one assigns you. A new small employer usually remits monthly, by the 15th of the month after the pay was made. A larger payroll can move you to a more frequent schedule, so read any notice that changes it.

This money is held in trust for the employee and the government. It is not working capital. Late or missing remittances lead to penalties and interest, and directors of a corporation can be held personally liable for unremitted amounts.

The new accounts in your books

Your chart of accounts gains a few lines the day you run payroll:

• Wages expense, for gross pay before deductions.
• Employer contributions expense, for the business’s share of CPP or QPP, EI, QPIP and the other contributions above.
• Source deductions payable, a liability holding what you withheld and owe the CRA and Revenu Québec, together with your employer share.
• Vacation pay payable, a liability for vacation pay employees have earned but not yet taken or been paid.

Each pay run is recorded at its gross amount, not just the net deposit that leaves the bank. Each month, reconcile the payroll liability accounts against what was remitted. Right after a remittance, the balance should equal only the deductions and contributions whose remittance is not due yet. A balance that keeps growing usually means a remittance was missed or recorded in the wrong place.

Vacation pay and statutory holidays

Each province sets its own labour standards for vacation time, vacation pay and statutory holidays. In Quebec these come from the Act respecting labour standards, administered by the CNESST. Entitlements generally grow with years of service, so set them up correctly in your payroll software from the first pay.

Year-end slips

Every employee gets a T4 slip for the year. Quebec employees also get an RL-1 slip from you, for Revenu Québec. Both are due, with their summaries, by the last day of February of the following year. The totals on the slips should match what your books show as wages and remittances for the year, so reconciling payroll monthly makes February much easier.

When someone leaves

When an employee stops working or has an interruption of earnings, you issue a Record of Employment (ROE) to Service Canada within a set number of days. Final pay should include any vacation pay owed.

Keep the records

Keep payroll records: pay stubs, timesheets, the employee’s tax forms, remittance confirmations and slips. The CRA generally requires records to be kept for six years from the end of the year they relate to, and Revenu Québec has similar rules.

Before you hire

• Confirm the person is an employee, not a contractor.
• Open the CRA payroll account and, in Quebec, register with Revenu Québec.
• Register with your province’s workers’ compensation board.
• Set up payroll software and the new accounts in your books.
• Put the first remittance date in your calendar.
• Ask your accountant about anything that depends on your situation, such as benefits or paying family members.