Filing Deadlines For Source Deductions | Virtual Accountant
When the most important things that an entrepreneur can keep in mind as soon as they start paying themselves a salary, or when they get their first employee, is ensuring they are calculating the correct source deductions says, virtual accountant. If not, they may find that they are facing a payroll audit that can negatively impact their business finances.
One of the first things that an entrepreneur should keep in mind, that as soon as they start paying themselves or employees’ salaries or wages, they need to be calculating the correct source deductions and withholding them from those paychecks. Many entrepreneurs believe that even though they may take a salary, since they are the business owner that they are exempt from source deductions and this is untrue says, virtual accountant. All employment income regardless of who is on the receiving end must have all the appropriate source deductions withheld. This means not only the employee CPP but also the employer CPP amounts, EI and income tax need to be accounted for.
Not only is it important for an entrepreneur to ensure that they are withholding the correct source deductions, but they also need to be submitting their payroll remittances to Canada revenue agency on time. Most small businesses are required to submit payroll remittances on a monthly basis, on the fifteenth day of the month. Whichever month a payroll was issued in, the source deductions are due the fifteenth day of the following month. That means, for any payroll issued in January, the source deductions are due 15 February for example.
A virtual accountant recommends that entrepreneurs do not wait until the fifteenth day of the month to make those payments, and it is far more efficient to submit source deductions at the same time as payroll. By doing this, entrepreneurs can ensure that they are never risking a late payment and that they will never miss calculating the source deductions. Since he will be running payroll and calculating the source deductions at the same time, they can kill two birds with one stone they using the same figure 2 submit payroll remittances.
It is also important that an entrepreneur is very careful with their source deductions calculation because as long as they are making regular source deductions payments, Canada revenue agency will not tell an entrepreneur if they have underpaid those source deductions. The reason why is because the Canada revenue agency does not do the calculation until an entrepreneur has submitted their T4 slip. Then, if they notice that the amount of money that they have paid versus the amount of money that they should pay does not match up, the best-case scenario is Canada revenue agency will send a letter requesting payment, and in the worst-case scenario trigger a payroll audit.
A business owner can simply avoid triggering a payroll audit by ensuring that there T4 and T5 slips are filed on time and that they are paying payroll remittances on time and in full every single month.
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If an entrepreneur is not sure when or how to file their T4 and T5 slips properly say virtual accountant, they could end up triggering a payroll audit from Canada revenue agency. If that is the case, all grey area transactions could be scrutinized, and be assessed for additional taxes as well as interest payments. Since half of all Canadian entrepreneurs fail by year five, and 29% of those failed entrepreneurs say the reason why their business failed was that they ran out of money, entrepreneurs can actually cause their business to fail if they trigger a payroll audit.
An entrepreneur should ensure that they are paying the correct source deductions and remitting payroll remittances to Canada revenue agency monthly. However, if when an entrepreneur files their T4 slips at the end of February, they may discover that they have accidentally underpaid their source deductions. If this is the case, an entrepreneur has a couple of options to avoid triggering a payroll audit. The first option is to simply make a payment for the amount that they are short. If an entrepreneur is not financially able to make that payment, they could request help from their virtual accountant to reclassify all of their income as a shareholder loan or dividends. That way, all of the payroll remittances they have already submitted themselves, can be reclassified to their employees. This may be enough to help an entrepreneur avoid being short on their payroll remittances.
However, even the best intentions mean that an entrepreneur may be faced with a payroll audit. If this is the case, the virtual accountant recommends that an entrepreneur is proactive in order to help themselves have clean statements so that an auditor may go easy on the entrepreneur. For example, prior to their audits, an entrepreneur along with their virtual accountant should assess all of the personal benefits that an entrepreneur has claimed. If there are any amounts that they have taken that have not been attributed to their T4 for T5 slips, they should be attributed to their shareholder loan account before the auditor sees the financial statements. That way, the auditor will be able to see that the entrepreneur is credible and being upfront and honest about the amounts that they did not initially claim. That can help an auditor be lenient when looking at grey area transactions and give the entrepreneur the benefit of the doubt.
When the auditor reviews the bank statements and credit card statements of the business, they are going to be not only assessing all of the personal benefits that an entrepreneur has taken out of the business ensure they have properly attributed but also they are going to be looking to see if there are any amounts that were paid to individuals that should have in fact been employees with source deductions taken off of their checks and sent off to Canada revenue agency.
In order to help an entrepreneur ensure that they do not have to go through a payroll audit, and potentially end up paying taxes on business transactions, is for an entrepreneur to ensure that they always file their T4 and T5 slips by the end of February at the latest, that they are calculating the correct amount of source deductions and paying them on time.