Virtual Accountant | Why Paying Source Deductions On Time Is Important
While many entrepreneurs understand how important it is to ensure that they are withholding the correct source sections from their employee’s paychecks says virtual accountant, they may not understand that there is a hard to the deadline to submit those remittances to Canada revenue agency. If an entrepreneur fails to submit payroll remittances on time, they could actually trigger a payroll audit that could be financially devastating to their business. Since half of all entrepreneurs end up failing within five years, and 29% of those failed entrepreneurs say the reason why they failed is that they ran out of money, avoiding audits can be an important way for entrepreneurs to avoid running out of money.
One of the first things that entrepreneurs should ensure they are doing, is recording the correct employment income on their T4 slips. The virtual accountant says that these slips need to be filed by the end of February, and all salary or wages that an entrepreneur pays themselves or their staff should be included in these slips. These slips will tell Canada revenue agency how much should have been withheld on those checks for source deductions, and how much an entrepreneur should have paid Canada revenue agency. If an entrepreneur fails to pay these payroll remittances on time, or in the right amount, they could trigger a payroll audit.
The virtual accountant says that while the deadline for payroll remittances to be submitted to CRA is the fifteenth day of the month, the best practices not for the entrepreneur to wait until the fifteenth to pay, but submit these amounts to Canada revenue agency while they are doing payroll. This can help them avoid having to calculate the correct amount twice, and since entrepreneur already has that amount handy, they can simply send the payment off to Canada revenue agency and be done with it. If they try to pay it later, they may either forget, or something could happen that would make them paying late.
If an entrepreneur has accidentally been underpaying or has missed a payment of payroll remittances, they do have until January 15 to catch up on anything that they have missed if CRA has not already figured out that they are in arrears. The virtual accountant says if an entrepreneur has underpaid remittances, but they cannot afford to submit a payment, but an entrepreneur can get their virtual accountant to do, is reclassify their own income as shareholder loans or dividends, so that remittances that the entrepreneur has claimed for their own salary can be reclassified for employees. This may be enough for an entrepreneur to avoid appearing short on payroll remittances to Canada revenue agency, and avoiding triggering a payroll audit.
In order for an entrepreneur to avoid a payroll, audit says virtual accountant, understands that their T4 slips must be filed by the last day of February, and ensure that they are remitting source deductions on time and in the correct amount. By doing that, the Canada revenue agency will not have any reason to do a payroll audit.
Virtual Accountant | Why Paying Source Deductions On Time Is Important
While most entrepreneurs understand how important it is to ensure that there submitting payroll remittances to Canada revenue agency on time says virtual accountant, they may not know what the penalty is if they ever miss a payment, or submit the wrong amount by the end of the year. The best-case scenario is that the Canada revenue agency will send the entrepreneur letter letting them know that they are short by a certain amount and requesting that the entrepreneur pays that amount in full immediately. However, in the worst-case scenario, the late or underpayment will trigger a payroll audit.
If an entrepreneur is facing a payroll audit in their business, one of the first things that they should do according to a virtual accountant is reviewing all of their personal transactions in their business to ensure that they have claimed all amounts either on their T4 order T5 slips. If they have not, they should ensure that they are classifying those amounts to their shareholder loan account before the auditor reviews their financial records. This way, an entrepreneur can show the auditor that they are being reasonable on identifying what the personal benefits they claimed are. This will help the auditor give the entrepreneur the benefit of the doubt, especially when looking at grey area transactions.
During the audits, a virtual accountant says an entrepreneur should expect the auditor to ask not only for their monthly bank statements and credit card statements for the last year, but also the general ledger of the business. An auditor is going to be looking for to specific things.
The first thing that an auditor looking for is for any payments that went to individuals instead of businesses. They are going to verify if these payments were in fact employees of the corporation that should have had source deductions taken from their amount and a T4 issued. This is where hiring unincorporated businesses can be risky for entrepreneurs. For example, if an entrepreneur is hiring a cleaning company that was unincorporated to clean the office once a month, the payment would be made to the cleaning company owner’s personal name, and the Canada revenue agency auditor might deem that person a staff member and not an outside company. Business owners should always be very aware of what may happen if they hire unincorporated businesses.
The second thing that auditors are going to be looking for are all the personal benefits that an entrepreneur has taken out of their business. Going to ensure that they have claimed them properly on a T4 or it T5 account. The more transactions an entrepreneur has not claimed, and the more likely an auditor will be to classify grey area transactions as personal expenses, causing an entrepreneur to pay significantly more in taxes.
In order to avoid a payroll audit, virtual accountant says business owners can do two things: file their T4 and T5 slips on time by the last day of February every year, as well as ensure that they submit payroll remittances on time and in full by the fifteenth of the month every month. By doing this, entrepreneurs can avoid payroll audits in their business indefinitely.