Benjamin Franklin wrote that there are two certainties in life: death and taxes.
He meant it in jest, but it’s always been taken as partially true.
It isn’t just true for the United States, either. In Canada, taxes are just as inevitable. Business can either be a huge benefit to you, or a giant tax burden depending on how you manage your financials. Payroll taxes will be part of the largest segment of taxes you will need to pay, so it’s important that you understand your obligations and withhold enough to satisfy your bills.
As a small business owner, you are required to pay both state and provincial taxes related to the amounts you pay your employees. This is called the payroll tax, and you withhold a certain amount each time you pay your employees to save for this. These taxes don’t just cover the employees; they also pertain to the Canada Pension Plan, Employment Insurance and even the PHSP. Depending on the state, you may also pay into the disability fund.
Even if you are the sole owner and you pay yourself by paycheck, you are still considered an employee of your company and, while you’re exempt from Employment Insurance taxation, you’ll still have to pay for the Canada Pension Plan. However, there are exceptions depending on your incorporated status. An unincorporated business without employees pays an estimated tax each quarter.
Small businesses are the unfortunate recipients of increased scrutiny from regulatory bodies. Small companies have a history of dodging or hiding their tax obligations, and remain one of the largest sources of uncollected revenue for the CRA. This is only compounded during an economic downturn, as the government is looking for those missing income sources to help fill its depleting coffers.
Expect increased attention from the CRA and constant changes to the law. Privatized services automate the process of payroll. For instance, the ADP employment tax service tries to simplify employment tax compliance and minimize the risk for a company's in-house payroll. Beginning with the collection of this payroll, private companies estimate your withholdings and give you statements and paychecks. This way, your taxes are essentially done by the time your quarterlies are due.
In addition to your basic tax obligations, there are fees that can add to your tax bill. Delinquency in your tax deposits, or your payroll, can result in some serious fines added to your tax bill each year. Failure to file is an additional problem, which usually comes down to either inexperience or lack of attention.
To be frank, the CRA is aggressive in its pursuit of unpaid taxes and can utilize a variety of means to intimidate and collect. It can contact your customers and send out notices of your delinquent bills, or it can choose to confiscate your equipment and padlock your business. All of this is done, usually, without a court order. It can even take your home.
Borrowing from your payroll taxes is also a no-no. A lot of small businesses fall into this trap when they begin to scale. They find that operating costs are higher than expected, so they dip into company payroll to cover the balance. It’s important that you retain a tax professional to help you navigate some of these legal pitfalls, even if only in an advisory capacity, as the risks do not outweigh the potential for reward.
Every small business is obligated to withhold payroll taxes for its employees. It’s a federal crime to leave your taxes unpaid, and the CRA will pursue you aggressively until you pay up. In addition, it costs your business more to leave the bill unpaid.
No one likes to pay taxes, but since you must do it, you should make sure that you’re covered. Using a payroll service company will simplify much of the process, but you should consider seeking outside help from a tax professional. Their advice can help save you thousands per year that you can dump back into your business.