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Entrepreneurs should learn early on in their business according to virtual accountant how to file their T4 and T5 slips properly, in order to avoid a payroll audit. Payroll audits can cause entrepreneurs to have additional problems because they may be assessed with additional taxes. Since 50% of all entrepreneurs fail, and 29% of those failed entrepreneurs say that one of the reasons why they failed was because they have run out of money in their business, avoiding triggering additional payments can be significant to help entrepreneurs stay cash flow positive in their business.
The first thing that entrepreneurs need to understand, is what a T4 and a T5 slip are. What these slips are recording, says virtual accountant is how much money a business owner has taken out of the business in salary and dividends. A T5 slip is specifically for dividends of the corporation. This is the only way that prophets of the corporation can get disbursed, and therefore is only payable to owners and shareholders.
A T4 slip on the other hand is for all employment income, therefore everyone who has taken salary or wages in the form of employment income is eligible to receive a T4 slip. Employment income is considered an expense of the business, as well, the appropriate source deductions must be withheld from all checks and remitted to CRA. This includes the employer and employee portion of CPP, EI and income tax.
Entrepreneurs should understand that these slips need to be filed by the end of February every single year. To be late puts an entrepreneur at risk for triggering a payroll audit. Also, because the T4 slip is going to have all of the source deductions that should have been permitted to CRA, an entrepreneur needs to ensure that they have admitted the correct amount to Canada revenue agency. Even though virtual accountant says payroll remittances are due on the fifteenth day of each month, if an entrepreneur is behind, they have until January 15 to catch up on all amounts that may have been missed.
If an entrepreneur does not have the amount of money to pay all outstanding source deductions by the fifteenth day of January, their virtual accountant may help them reclassify their own income that has previously been claimed as employment income as a shareholder loan or a dividend, so that all payroll remittances that they have submitted to CRA on behalf of themselves can then be reclassified to source deductions for employees. If they are still owing anything by the end of February, that also could trigger a payroll audit.
An entrepreneur can avoid a payroll audit, simply by filing their T4 and T5 slips on time, but also, by ensuring that they do not wait until the deadline to submit their payroll remittances to Canada revenue agency. By paying source deductions the same day as payroll, can help entrepreneurs avoid missing a payment, or forgetting a payment and therefore avoiding a payroll audit completely.
It is always in an entrepreneurís best interest to avoid payroll audits by all means necessary says virtual accountant, by ensuring that they file their T4 and T5 slips on time, as well as avoiding being late on payroll remittances, ensuring they do their payroll remittance calculations properly. However, some entrepreneurs may still find themselves faced with a payroll audit in their business. There are several things that they should expect, and some things that they can do proactively to ensure that the audit process goes smoothly.
One of the first things that entrepreneurs should do in their business before an auditor comes is to ensure that they are going through their own transactions but their virtual accountant. If they have taken any cash or non-cash benefits from their business that has not been claimed on a T4 or it T5 slip already, they should attribute it to their shareholder loan account. This way, when the auditor reviews all the transactions, they will see that the entrepreneur is being reasonable on admitting what the personal benefits they had are, and see that it has already been rectified.
When the auditor does come, virtual accountant says business owners should be prepared to show them their general ledger as well as all of the bank statements from the previous year. The auditor is going to be reviewing all transactions to see if an entrepreneurís personal benefits have been claimed. If there are many instances where personal benefits have not been claimed, and not attributed to their shareholder loan account, an auditor may assess all grey area transactions as being a personal benefit to the business owner due to the sheer number of transactions.
The second thing that an entrepreneur is going to be looking at when they review the bank statements is seeing all amounts that went out to individuals and not businesses. They are looking at these to see if employees were paid without having the appropriate source deductions withheld from their check and submitted to CRA. Any time an entrepreneur has paid an unincorporated business, this transaction could be put at risk during an audit. For example, if a business owner was paying a cleaner to come into their business and clean the office once a month if that cleaner was being paid personally, Canada revenue agency may consider them staff, and require that an entrepreneur pays source deductions on those amounts. Business owners should be very aware that any time they pay an unincorporated business or an individual, they should keep very good record so that they can prove that this was a business expense.
Virtual accountant says that while payroll audits can be common, an entrepreneur can do to simple things in order to avoid having to go through them themselves. The first thing is file on time every time. Even if an entrepreneur is unable to pay the appropriate taxes, if they file on time, they can at least avoid penalties. The second thing is for entrepreneurs to ensure they are submitting payroll remittances to CRA on time and in the appropriate amount. These two things will help entrepreneurs completely avoid having to go through a payroll audit in their business.
