Payroll compliance and accuracy are the goals of every payroll practitioner. To help with the latter, here’s a list of five common payroll mistakes, followed by tips on how to avoid them.
Miscalculating taxable employment income
Many employers do not report personal and living expenses they’ve paid on behalf of employees as taxable employment income. However, unless the employee falls under a specific exemption, these amounts are considered taxable income.
Where an employee is provided free or subsidized housing, there is generally a taxable benefit to the employee equal to the fair market value (FMV) less any amount charged to the employee.
In addition, amounts such as bonuses, commissions, tips or gratuities, vacation pay, certain honorariums and flat-rate vehicle allowances (not related to the number of kilometres driven) must be included as part of the employee’s taxable employment income.
Reporting taxable benefits only at the end of the year
Use caution when assessing taxable benefits, such as employer-provided group term life insurance premiums. Schedule the applicable source deduction remittances according to the appropriate payroll schedule, and be absolutely certain you are calculating the actual value of the benefit, including any related taxes.
Otherwise, the employee may face income tax liabilities when he files his personal income tax return and the employer could face non-compliance penalties and subsequent audits from the Canada Revenue Agency (CRA) and Revenu Québec (RQ).
For more information, see CRA guide T4130, Employers’ Guide – Taxable Benefits and Allowances. For those paying employees in Quebec, also see RQ guide IN-253-V, Taxable Benefits.
Not remitting source deductions on time
Due dates vary depending on the type of remitter you are, which is determined by the CRA and RQ, based on your average monthly withholding amount from two calendar years ago.
Penalties ranging from three per cent to 15 per cent may be applied if you fail to pay or remit deductions by the prescribed deadlines.
As a best practice, payroll practitioners should create payroll schedules in preparation for the next year, and plan ahead for statutory holidays and leap years to ensure they meet their remittance deadlines and pay workers on time.
Failing to properly handle the treatment of bonus payments
Avoid errors when making bonus payments to employees by applying the following:
• Use the bonus tax method to calculate income tax deductions. The tax rate applied in pay period tables assumes an employee will be making X amount of dollars for the year, spread over Y number of pay periods; however, a bonus payment increases the employee’s overall earnings for the year. See the CRA guide T4001, Employers’ Guide – Payroll Deductions and Remittances and the RQ guide TP-1015.G-V, Guide for Employers: Source Deductions and Contributions for detailed examples on applying the bonus tax method.
• When making a bonus payment outside of the normal pay period run, do not surpass the maximum annual exemption — calculate the C/QPP contribution by multiplying the bonus amount by the current C/QPP contribution rate without applying the C/QPP pay period exemption and do not use the C/QPP tables (which have the pay period exemptions built into them).
• If an employee requests all or part of her bonus to be directed to her registered retirement
savings plan (RRSP), ask if she has enough contribution room. In addition, prior to transferring the bonus to the RRSP provider, deduct C/QPP, employment insurance (EI) and Quebec Parental Insurance Plan (QPIP) premiums on the entire bonus amount, unless the employee has already reached her maximum contributions/premiums for the year. Failure to do so could lead to
C/QPP, EI and QPIP deficiencies, particularly if the employee ends employment prior to reaching the annual maximums.
Miscalculating C/QPP contributions when there are 27 or 53 pay periods in a calendar year
Every 11 years, bi-weekly payrolls will experience a 27th pay period and every seven years, weekly payrolls will have 53 pay periods. In addition, when the first pay date of the year is scheduled for Jan. 1, the organization may elect to pay employees on Dec. 31, thereby creating an additional pay period.
Note: Labour standards in Quebec legislate that the payment be made the day before the holiday if the pay date was originally scheduled on a statutory holiday. In Manitoba and Nova Scotia, working days (not calendar days) are used in determining the timing of an employer’s wage payment requirements.
Do not exceed the annual maximum C/QPP exemption. Instead of using regular bi-weekly tables to calculate CPP contributions, use the CRA’s Payroll Deductions Supplementary Tables for 27 or 53 pay periods.
Since RQ does not publish similar tables, divide the annual exemption amount ($3,500) by the number of pay periods in the year.
Prepare a schedule prior to processing the first payroll of the year and calculate the expected number of pay dates, allowing you to apply the correct C/QPP exemption each pay as well as the correct income tax tables.
Janet Spence is the Toronto-based manager of compliance services & programs at the Canadian Payroll Association, which offers professional development seminars for members and non-members. For more information, visit www.payroll.ca.
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