How Can Small Business Owners Manage Payroll Liabilities

Small business owners start alone or in partnership, but there comes a time when you hire employees. This is a difficult decision, as employees come with a fixed monthly or weekly payroll expense. While you may pay yourself when your client pays you, that won’t work with employees. As an employer, you are responsible for paying the work compensation on time, irrespective of whether the client cleared the invoices. 

Hence, the salary due to be paid is called payroll liabilities. Managing these liabilities is essential for the smooth running of business operations.

Payroll Liabilities and Their Importance

Payroll liabilities are the amount an employer owes employees, government agencies, insurance carriers, and other entities involved in the payroll process. Some payroll liabilities may be short-term, and some long-term. There is also severance pay and other final settlements when an employee leaves. As a business owner, you must have a fair idea of the total cost of hiring and firing an employee.

Knowing the cost will help you with business budgeting, cash flow planning, and working capital requirements. As we said before, payroll liability has a fixed date, and delays or missouts could tarnish the business image, making attracting and retaining talent challenging. Understanding the cost of an employee will also help you determine how to price your product/service to the client, as this cost will be recovered from the revenue.

Types of Payroll Liabilities

In Canada, an employer incurs four types of mandated payroll liabilities over and above salary.

• Compensation: It is the salaries, bonuses, commissions, vacation pay, tips, and other forms of payments made to the employees. It may vary from employee to employee and company to company. As an employer, you can determine the compensation you want, the frequency of payment (weekly, monthly), and the mode of payment (in cash or other benefits such as medical, travel allowance, broadband). While determining the compensation structure, offer competitive pay to attract the right talent. This compensation will determine other payroll liabilities.
• Canada Pension Plan (CPP): The Canada Revenue Agency (CRA) requires you to deduct 5.95% of the salary above $3,500 as a Canada Pension Plan (CPP) and contribute an equal amount as an employer contribution. The employer must remit the CPP contributions to the CRA by the 15th of every month. 
• Employment Insurance (EI) premium: The employer must deduct 1.65% of the salary on maximum earnings of $65,700 for 2025 towards the EI premium and remit it to the CRA.
• Federal Income Tax: The employers make the above deductions, calculate the federal tax liability, deduct the tax from the salary, and remit it to the CRA monthly or quarterly.
• Provincial and Territorial Income Tax: The employer also has to deduct provincial tax based on the place of work. The provincial tax has to be calculated and remitted to the province.

Beyond the four mandated liabilities, some companies offer employer-sponsored benefits such as pensions, medical insurance, and Employee Stock Ownership Plans (ESOPs). You must add the cost of these benefits to calculate payroll liabilities.

The Cost of Failing to Make Payroll Deductions

The employer must pay the CRA, the CPP, EI, and income tax. If the business fails to deduct them from the employee’s salary, the company must pay that amount from its pocket.

Moreover, the CRA could impose a 10% penalty on the amount of these three deductions in the first instance when you fail to make deductions and pay the CRA. In the second instance, the penalty will increase to 20% of the deduction amount. In the event of multiple failures to pay the remittance, the CRA has the authority to garnish your sources of income or seize and sell property to collect the payroll deduction dues.

How to Pay Payroll Liabilities?

It is better to pay payroll liabilities on time and avoid CRA’s attention and penalties. To pay the payroll deductions to the CRA, you have to open a payroll account with the CRA. Next, you must enroll employees in the program by registering their social insurance number and completing Form TD1—Personal Tax Credits Returns.

It is suggested that a bank account for payroll be created to keep it separate from operating capital. You could collect payroll deductions in the dedicated bank account for payroll and remit them to the CRA monthly or quarterly.

At the end of the year, you must file a summary of all employees’ income and deductions and report each employee’s income and deductions on a T4 or T4A slip. The employer has to take four copies of this slip, give two to employees, submit one to the CRA, and keep one for their records by the last day of February. A failure to file the T4/T4A slip could attract penalties.

To pay payroll liabilities accurately and timely, you must manage them stringently.   

Managing Payroll Liabilities for Small Business Owners

Managing liabilities requires a well-organized step-by-step approach that must be updated regularly.

• First, you should track payroll dues regularly, including leaves, bonuses, overtime, reimbursements, and other payments.
• Next, know your deposit schedule, the salary credit date, when payroll deductions are to be remitted to the CRA, and any other payments.
• Maintain an adequate balance in your payroll account and schedule the payment.
• Keep and retain payroll and tax documents as federal, state, and local laws require. Prepare T4/T4A slips and distribute them before the deadline.