Virtual Accountant | What To Anticipate During A Payroll Audit
It is very important that early on in their entrepreneurship, virtual accountant says business owners should understand what taxes need to be paid by what deadline, and when to submit reports to Canada revenue agency. By understanding this, entrepreneurs can avoid triggering late penalties as well as additional taxes and even avoid audits. Since 50% of all Canadian businesses will fail within five years, and 29% of those failed entrepreneurs say that the reason why their business failed was that they ran out of money in their business. Avoiding having to pay additional taxes and late fees as well as interest charges can be significant especially as entrepreneurs are new in the business.
It is important that entrepreneurs understand what a T4 and T5 slips is early on in their business so that they can ensure that they are filing them on time in order to avoid problems with Canada revenue agency. What a T4 and T5 slips is recording says virtual accountant is all of the money that an entrepreneur has taken out of their business for personal benefits as well as non-cash benefits. Since an entrepreneur can only take money out of their corporation in two different ways, either as salary or dividends, this is what these two slips record.
T5 slips is referring to all of the dividends that an entrepreneur has taken out of their business. Since dividends are the way that profits get dispersed in the business, dividends are only payable to business owners and shareholders. Therefore, an entrepreneur should have a T5 slip only to themselves or their shareholders if they took dividends of their business.
Virtual accountant says a T4 slip refers to the salary that an entrepreneur has taken out of their business. But also, because the T4 slips refer to all employment income, if they have any staff that has taken salary or wages, they should also get a T4 slip. Since employment income is taxable, entrepreneurs should ensure that all employment income had the right source deductions withheld from the employeeís as well as themselves and that they have sent those payroll remittances to Canada revenue agency.
Not only is it very important that an entrepreneur files their T4 and T5 slips by the last day of February since that deadline. But, virtual accountant says it is also important that entrepreneurs ensure that they stay current all payroll remittances to Canada revenue agency. The deadline for those amounts is the fifteenth day of the month following payroll. However, virtual accountant recommends that entrepreneurs avoid submitting remittances this late. By ensuring that they submit remittances on the same day they run payroll, entrepreneurs can avoid paying late completely.
It is very important that entrepreneurs ensure that they file their T4 and T5 slips on time, and submit payroll remittances on time as well so that they can avoid triggering a payroll audit by Canada revenue agency. If they have a payroll audits, they could end up paying far more in taxes and interest, which could cause them to run out of money in their business that may force their business to close.
Virtual Accountant | What To Anticipate During A Payroll Audit
If an entrepreneur has filed their T4 and T5 slips improperly are late said virtual accountant, or if they have managed to fall behind on their payroll remittances to Canada revenue agency, they could find themselves in a payroll audit.
Many entrepreneurs question how Canada’s revenue agency will know if they have paid enough in source deductions. Virtual accountant says that once an entrepreneur files their T4 slips, it will have listed on their help much employment income has been paid out in their business. Since its percentage of employer and employee CPP, EI and income tax that should have come off of every single paycheck, once Canada revenue agency sees that T4 slips, and compares it to how much payroll remittances they received from the business. If the entrepreneur has fallen short and how much money they have sent CRA, the best case scenario says virtual accountant is that they will simply send a letter to the entrepreneur requesting the payment of the taxes in full immediately. However, in the worst-case scenario, it will trigger a payroll audit. This means that an auditor needs to check all T fours and T fives that have been issued to ensure the accuracy of them, or if an entrepreneur owes more money.
There are two things that happen during the payroll audit. Virtual accountant says the payroll auditor will ask to the business owner to provide a copy of their general ledger as well as copies of each monthly bank statement for the past year. They will be looking at the bank statements in order to verify the amounts that were dispersed to individuals instead of businesses. What they are looking for, is any instances that an entrepreneur has paid an employee and not claimed it on their T fours, and not paid the appropriate source deductions for. This is risky, because any time that an entrepreneur has issued payment that was not to an employee but it was to an individual, could be put at risk. If an entrepreneur has hired an unincorporated business and paid for their service with a check to that person’s personal name, that transaction and others like it could be at risk.
The second thing that an auditor is looking for says virtual accountant is all instances where an entrepreneur has taken money out of their business or non-cash benefits such as paid a vehicle payment or mortgage payment that they have not claimed on a T4 or T5 slips. The more transactions that are not claimed, will cause an auditor to consider grey area transactions as personal expenses. This could end up costing an entrepreneur significant amounts of taxes, both in the amount that they should have claimed in the first place and also by having to pay personal taxes on those grey area transactions.
This can end up costing an entrepreneur a significant amount of money if they go through a payroll audit, so it is very simple that they can avoid a payroll audit by filing their T4 and T5 slips on time and ensure that they are always up-to-date with payroll remittances.