December can be one of the most hectic months for payroll
It is December and every payroll professional knows what that means. It is time to expertly juggle many balls at the same time, being careful not to drop any of them.
Not only does payroll have to make sure employees are paid their last pay of the year on time, they also have to get ready for the first pay of 2016 and for 2015 year-end reporting.
"You could potentially be working on two pay cycles at the end of the year," says Annie Chong, manager of Carswell’s Payroll Consulting Group in Toronto. "You have to
manage that properly and find time to do some quick runs to make sure that everything is set up properly for the first pay of the year," she says.
"At the same time, you need to close off the year and you are going to have to get all the information necessary from your internal departments and maybe your employees (for taxable benefits) so that you can properly balance your year end."
Friday paydays
This year may present some additional challenges for employers with Friday paydays. The statutory holidays for Christmas and New Year’s Day both fall on a Friday. As a result, employers may need to adjust pay schedules to ensure they pay employees within the timeframes required by employment standards laws. Being late with a payday because of a holiday is not an excuse.
Employers with Friday paydays that have Quebec payrolls will have no choice but to pay employees by the working day before the Friday statutory holidays. Quebec employment standards rules require it.
Quebec is the only jurisdiction with this obligation, but Chong suggests that, as a best practice, employers in all provinces and territories do this to ensure employees have no interruption in paydays.
Employers that opt to change paydays to accommodate the Jan. 1 statutory holiday need to keep in mind the decision may affect statutory deductions and year-end reporting and will need to be communicated to employees.
Since the Canada Revenue Agency (CRA) requires that statutory deductions be based on the date employees are paid, rather than when they earn the pay, any earnings paid in 2015 will be subject to 2015 statutory deductions and will have to be reported on a 2015 T4 even if they include pay for days in 2016.
This has implications for employee and employer maximum annual Canada/Quebec Pension Plan contributions and employment insurance and Quebec Parental Insurance Plan premiums.
The best way to manage the hectic nature of the month is to plan for it well in advance. Ideally, Chong says this should be done at the beginning of the year.
"If you are able to do that early in the year, you can establish what the end of the year is going to look like in terms of paying employees and meeting the minimum requirements under (employment standards)."
Leaving the decision until December can leave payroll departments scrambling to change pay dates, issue cheques on time to employees who do not use direct deposit, and to communicate the change to employees.
Boxing Day holiday
Even for employers that do not have a payday falling on the December or January statutory holidays, the days can still present a challenge for payroll, especially in jurisdictions where Dec. 26 (Boxing Day) is also a holiday.
"A big issue is that the three stats fall together, so (holiday pay) calculation is an issue," says Theodora Lindsey, a consultant with Carswell’s Payroll Consulting Group.
In most jurisdictions, holiday pay is based on the amount of wages paid to an employee within a specified number of days or weeks before the holiday. For example, many jurisdictions require employers to include wages paid or owing within four weeks or 30 days before the holiday.
The calculation can be even more complicated in jurisdictions that mandate employers to include statutory holiday pay paid or owing within that timeframe when calculating pay for another statutory holiday in the same period.
In addition, some employees take vacation in December, which can further complicate employee pay.
"(You have to) manage paying vacation pay to an employee while they are on vacation and separating out the days that are deemed vacation days versus the stat holidays," says Chong.
Bonuses, gifts, parties
December can also be challenging for payroll because of the extra bonuses, gifts and holiday parties employers provide. Lindsey says she gets a lot of calls about company Christmas parties and gifts.
"We get all kinds of questions (such as) ‘We’re giving some gifts through the social committee, would those be subject to taxable benefits?’ We get questions about (paying for) taxis, hotels, flying family over from other countries and putting them up and paying their expenses," she says.
Under Canadian tax rules, employer-paid Christmas parties are not a taxable benefit to employees if the party costs no more than $100 per person. If it costs more than that, the entire cost is a taxable benefit, not just the amount that exceeds $100. When calculating the per person cost, the CRA does not allow employers to include items such as taxi fares or hotel accommodations. If the employer pays for these items, they are taxable to employees.
"Most people are quite shocked that there is that $100 allowance. They are quite shocked that if they pay somebody’s spouse’s plane fare (to get to a party), that it is a taxable benefit to the employee," Lindsey says.
When it comes to employer gift giving at Christmas, Lindsey and Chong say payroll departments need to be aware of the gifts being given and the possible income tax implications.
Some gifts will be taxable, while others will not. The CRA’s policy is that non-cash gifts will not be taxable as long as they are for a special occasion, such as Christmas or another religious holiday, and the total value of gifts given to the employee in the year is not more than $500.
Cash and near-cash gifts are always taxable benefits. Near-cash gifts include gift certificates, gift cards and items that can be easily converted to cash, such as gold nuggets, securities, or stocks.
Another issue to consider is who pays for the gifts. If a social committee buys the gifts and the committee is completely funded by employees, the gifts would not be taxable. However, if the employer funds the committee, the gifts may be taxable depending on the conditions already mentioned.
Payroll has to look at all of the circumstances surrounding gift giving to determine if there will be a taxable benefit, says Lindsey. "It is a lot of monitoring. You have to monitor how much it is. If it is a specific Christmas gift and if it is non-cash, is it going to be over $500?"
Chong adds that, "You have got to isolate each of these case scenarios and fit them accordingly within the legislation in order to determine whether it is taxable or non-taxable."
Taxing gifts can also be challenging because in some cases payroll may not even know that the employer is giving gifts to employees. "It is common for an organization to make purchases through AP (accounts payable)," says Chong.
"They use a corporate credit card and one of the employees goes to the Bay and picks up a non-cash item. We (payroll) do not know what the values look like. We are not paying for it. If AP doesn’t tell payroll, how would we know?" she adds.
"Payroll always complains about how they are always the last people to know about anything because things are being done through HR or finance," Chong says. "Payroll does not get any of that information. If we are not aware of it, we can’t accurately report or assess the deductions."
"In the event of an audit, do you think the CRA is really going to care that payroll doesn’t talk to HR? No. As far as they are concerned, they want their money and if you haven’t been in
compliance, you are going to have to pay," she says.
To avoid problems, Chong says payroll should initiate discussions about payroll compliance with other departments.
"They (payroll) need to communicate the rules, the deadline requirements, and the regulations concerning payroll to all the players within the organization so that everybody is on the same page," Chong adds.
Employers without good communication among departments can run into problems with the CRA. Chong tells of one client whose company’s gifts and awards program was run out of its HR department in the United States. The Canadian payroll department did not know anything about it and so was not assessing taxable benefits until a CRA audit shone a light on it.
"The CRA came in and not only did they levy fines and penalties for not being in compliance, they made the employer go back five years and revise T4s for everyone who received a gift or an award that was taxable," says Chong.
The employees who received the gifts had to re-file their taxes and pay income tax on the items.
While December may be too late in the year to fix all payroll problems that arose in the last 12 months, there is always a chance for a fresh start in the New Year.
"If you want to get your payroll in order, there are a lot of steps that you can take at the beginning of the year and manage it throughout the course of the year so that you are not left in December scrambling trying to get everything in order or figuring everything out," Chong says.
