Preparing for Corporate Year-End Taxes: Part 1 – Previous Year’s Information
Preparing for Corporate Year-End Taxes: Part 2 – Bookkeeping
Preparing for Corporate Year-End Taxes: Part 3 – Payroll Records
Preparing for Corporate Year-End Taxes: Part 4 – Remittances
Preparing for Corporate Year-End Taxes: Part 5 – Other Important Documents
In Part 3 of preparing for corporate year-end taxes, we explain payroll records.
Year-end taxes are an unavoidable part of running a business. They must be done every year, whether or not we want to have them done (let’s be honest, who really wants to do taxes?!). Rather than putting off the looming tax obligations that many business owners dread, we have found it’s very beneficial to know what will be required come year-end so businesses can prepare throughout the year! This helps to avoid the stressful scramble of trying to find missing records or information that the accountant needs to complete corporate taxes at the end of the year. In this part of the series, we will explain the payroll records that need to be prepared for year-end taxes.
1. Payroll Accounting Records
It is very important that the payroll accounting records are prepared throughout the year. This involves recording the payroll journal entries in the company’s accounting software that is used. The journal entries include the company’s financial information of each payroll processing period such as the total salaries paid, benefits that were deducted, vacation pay, employer taxes, and employee taxes that were withheld. This payroll accounting must be done throughout the year, as there are payroll taxes including Employment Insurance (EI), Canada Pension Plan (CPP), and Income Taxes (Federal and Provincial) to be calculated by the employer and remitted to the government regularly. These payroll taxes are called source deductions. We will explain these payroll remittances more in Part 4 of this series.
A T4 slip is a summary of all employment earnings and deductions for one calendar year. Employees receive a separate T4 slip from each company they earned money from. It is the employer’s responsibility to ensure that a T4 is filled out and sent out to every single employee that worked for them during the year, and must also file the T4 slip with the Canada Revenue Agency (CRA) by the last day of February the following calendar year. It is important to know that for each former employee of the company, the employer is required to submit a Record of Employment (ROE) to the CRA as well as the T4. The ROE must be submitted within 5 calendar days after the end of the pay period where the employee’s earnings ended.
When preparing T4 slips, it is important to reconcile them as they are prepared. Reconciling involves comparing 2 sets of records to make sure they match and are equal. Compare the T4 to each employee’s payroll records to ensure all the numbers are correct, and also make sure to double-check their information such as their SIN, birth date and address.
3. T4 Summary
A T4 summary is another report that must be created and filed with the CRA by the end of February the following calendar year. This form has the totals of the information reported on all the T4 slips created for each employee. The information on the T4 summary includes totals such as total insurable earnings for all employees in the company, and total contributions from both the employer and employee portions for EI, CPP, and Income Taxes so the CRA can compare those totals to the total source deductions remitted by the employer. When preparing the T4 summary, reconcile the totals by comparing them to the T4s that have been completed, as well as the payroll accounting records. It is important to perform this reconciliation prior to sending the T4s out to employees and filing the T4s or T4 summary with the CRA, as this will allow the chance to catch and prevent any errors.
The above article explains the 3 major areas of payroll information that will be needed to complete year-end corporate taxes. While most T4s and the T4 summary will need to be completed at the end of the year, the reconciliation of the payroll records can be done throughout the year to make the process easier come year-end. T4s for former employees who left the company during the year can also be prepared before year-end to alleviate some of the workload. You can visit The Canadian Payroll Association (CPA) website for a detailed checklist of year-end/new year payroll action items available for direct download.
For information on the payroll remittance information needed for corporate year-end taxes, as well as other government remittances, stay tuned for Part 4 in this series.
Download this resource Preparing for Corporate Year-End Taxes: Part 3 – Payroll Records.