Virtual Accountant | What Are T4 And T5 Slips
If entrepreneurs want to avoid getting an audit for their payroll, the one thing that they should do according to a virtual accountant is to make sure they avoid filing their T4 and T5 slips late. If entrepreneurs fail to file the slips, or file them improperly, they may find themselves at the end of a payroll audits where the auditor is going to look at all of the grey area transactions and scrutinize them. The first thing that entrepreneurs should do when it comes to their T4 and T5 slips to ensure that there filed properly is to understand what they are.
Virtual accountant says that when entrepreneurs understand what is supposed to be recorded on T4 and T5 slips, they can ensure that they are keeping accurate records. Any money that an entrepreneur takes out of their business for personal benefits or even non-cash benefits needs to be recorded on their T4 and T5 slips. When an entrepreneur takes money out of their corporation, they do so in two different ways: salary which requires a T4 slip, or dividends which require T5 slips.
When an entrepreneur takes salary out of their business, this is considered employment income. Not only business owners, but armís-length employees can take a salary out of the business. This is an expense on the income statement, and all employment income must have source deductions taken from them. This means the employer and employee CPP, EI and income taxes. Dividends, on the other hand, are only payable to business owners and shareholders. Dividends referred to the disbursement of the prophets, therefore is not considered an expense of the business, and is not considered employment income, and do not have any source deductions taken from them.
Once an entrepreneur understands what the T4 and T5 slips are, the next thing they should understand in order to ensure that there filing of accurately and on time is understanding when they need to be filed. These slips, without fail must be filed by the end of February. This means February 28, or twenty-ninth on the leap year. The deadlines to submit payroll remittances for T4 amounts actually needs to happen on a monthly basis. The deadline for these says virtual accountant is on the fifteenth day of the following month that the money was disbursed. This means any funds that were dispersed in January will have a February 15 file deadline. However, if an entrepreneur has remitted to little payroll remittances, they have until January 15 of the following year to catch up on anything missed the previous year.
By understanding what T4 and T5 slips are, and then they need to be filed can help entrepreneurs ensure that there filing them properly and on time. The best-case scenario is that Canada revenue agency will send a letter to the entrepreneur letting them know that these filings are missed and requesting payment, however, the worst-case scenario is this will trigger a payroll audit, which will result in an entrepreneur having to show all transactions in their business for the year.
Virtual Accountant | What Are T4 And T5 Slips
It is extremely important that entrepreneurs understand that if they do not file their T4 and T5 slips on time or at all, will trigger a payroll audit from Canada revenue agency says virtual accountant. The reason why this is a problem is because an audit will require an entrepreneur disclosing all of the transactions they had in the previous year, and if the Canada revenue agency auditor believes that an entrepreneur has paid themselves money that they have not claimed, or if they have paid employees that they have not claimed on their source deductions, they will owe additional taxes plus penalties and interest.
Because T4 and T5 slips are related to the amount of money that an entrepreneur has taken out of their business, many entrepreneurs wonder how does Canada revenue agency knows if they have paid enough source deductions or not? When an accountant prepares a T4 slip for an entrepreneur, this slip will have how many employers and employee CPP, EI, and income tax should have been deducted from their employment income say virtual accountant. If the amounts that a business owner has submitted is not equal to that amount, CRA will clearly see that an entrepreneur owes more in taxes.
If an entrepreneur has not paid enough taxes, or if they have not filed their T4 and T5 slips on time, it could trigger an audit. What happens when they get audited, is that the auditor will ask the business owner for a general ledger as follows bank statements. The two main functions that the auditor will do is first, they will look at the bank statement in order to see the amount of money that paid out to people. The reason they are going to do this is to verify if these people should have been considered employees that should have had source deductions removed from their employment income, and have a T4 issued. This is where hiring unincorporated contractors is a risky move because CRA may consider them staff. For example, if a business owner hires a window washer to come in and clean all of the exterior windows in their business, and that window washer is an unincorporated business, they might make the check payable to John Smith, and Canada revenue agency may step in and consider this payment staff. However, if an entrepreneur hires that same window washer who is incorporated, the payments show up on the bank statement as going to the corporation, and CRA will not have a problem with the disbursements.
The second function that happens in an audit is auditor to review all cash and non-cash benefits an entrepreneur has taken out of their business. If there is any instances of an entrepreneur taking money that they have not claimed on their T4 or it T5 slips, that could trigger additional penalties as well according to a virtual accountant.
In order to avoid a payroll audit, entrepreneurs can do two things: file on time, even if an entrepreneur is not able to pay their taxes at that time it is still better to file. And number two, pay all payroll remittances on time. By doing these two things, an entrepreneur will prevent a payroll audit in their business.