Yeah, it’s everyone’s favourite topic: paperwork. And, not just any paperwork, it’s payroll paperwork. We’re talking payroll records. The records you keep for your small business and the people you pay.
There’s more to it than issuing a pay stub to each employee whenever you run payroll, which you are legally required to do in Canada. There’s an entire laundry list of records to keep and reasons why you need to keep them.
If you thought the hobbits in The Lord of the Rings were a bit obsessive about their jewelry, imagine an employee who needs information from your payroll records to get a personal loan or mortgage.
The people at the Canada Revenue Agency (CRA) or Revenu Québec (RQ) are also more inclined to be satisfied with real-world evidence rather than taking your word for it.
Payroll records are anything that has to do with hiring your employees and contractors, paying them and sending payroll taxes to the CRA and/or RQ. For such a simple answer, there are actually a lot of moving parts to payroll records.
Employee payroll records include basically everything from the time you hire them going forward, including if they leave for any reason:
For contractors, this includes:
For your business, this includes your:
Your payroll records are your paper trail. They’re the documents you can come back to if you or your employees have questions.
From the moment you hire an employee and start paying them, you’re tracking both income and tax obligations — for you and your employee. Throughout the year, with each paycheque, you’re accounting for Canada Pension Plan (CPP) or Québec Pension Plan (QPP), Employment Insurance and income tax amounts that impact the employee’s income taxes and the employer’s business taxes.
With each pay run, you create a pay stub, an individual record for each employee. At the end of the year, you issue T4s to your employees and T4As to any contractors that you’ve paid more than $500 to in that year. In turn, you’ll also record the amounts you paid in wages and taxes in your business income tax return.
Throughout the year, you’ll also be keeping track of the amount of payroll taxes you’ve sent to the CRA and/or RQ.
If, at any point, there’s a question or an error to be resolved, you want to have the full paper trail so you can find exactly what got missed and when. This is especially important if, for any reason, the CRA or RQ triggers an audit.
Similarly, if there’s a compensation dispute between you and an employee or contractor, you’ll want to be able to refer back to your records.
Accurate payroll records also help you support your employees when they need an income verification letter to apply for a mortgage or any other sizable loan.
Dramatic pause and drumroll. According to the CRA, employers should keep payroll records for the current year plus an additional six years beyond that. The National Payroll Institute (NPI) calls this the 7-year or 6+1 rule. So, long story short, up to seven years.
You know how it’s common for parents to give children a first, second and third warning — with escalating degrees of consequences? It’s sort of like that.
If the CRA needs to see your payroll records, first, they’ll send you a letter. If you can’t provide these records, they’ll give you ways to resolve the issues. They’ll also outline what happens next if you don’t get your records in order.
If there’s a tax issue and you still fail to comply, the CRA may respond with a fine ranging from 50% to 200% of the tax owed.
Keeping payroll records isn’t just about saving files. It’s about making sure they’re safe, secure, and ready if the CRA or Revenu Québec ever asks to see them. Here are a few best practices:
Payroll software makes all three steps easier by automatically creating, storing, and securing records, so you don’t have to think twice about it.
Not only does Huumans Payroll make it easy for you to pay your employees and contractors, it also automates your payroll record-keeping. Whenever you set up a new employee, run payroll or send payments to the CRA or RQ, Huumans Payroll keeps a digital record. This means your payroll records are at your fingertips whenever you need them. Learn more about how it works and how you can pay up to five employees for free for the first year.
For more on small business payroll and payroll record-keeping, see the following links:
At least six years plus the current year (the 6+1 rule).
Yes. CRA and RQ accept digital records as long as they’re accurate, accessible, and secure.
The CRA and RQ may audit, reassess, or apply fines.
