If you have employees, as an employer you are obligated to automatically deduct income tax each time you pay your employees.
You are also obligated to issue T4 slips to all employees from the past year by the end of February. For your employees, the T4 slip(s) represent the entire income earned and how much they paid in taxes throughout the year.
For employees, filing taxes is easy and any off-the shelf software will walk them through the preparation and filing of a tax return, with out the need to hire an accountant.
If you’re a self-employed contractor, it’s entirely different.
You’re responsible for knowing how much money you make, what you can and can't deduct, and knowing how much money you need to remit in taxes.
Failing to understand Canada’s contractor tax law is not an excuse when it comes to preparing and filing your taxes.
As a self-employed individual or small business owner, in addition to remitting your own taxes, you have the additional obligation of filing T4 slips for each employee.
Requirements of Filing a T4 Slip for Your Employees
Generally, you need to fill out a T4 slip if you are an employer (resident or non-resident) and you paid your employees employment income, commissions, taxable allowances and benefits, fishing income, or any other remuneration.
According to the CRA, there are 5 main types of income you should report on T4 Slips:
- Salary, wages (including pay in lieu of termination notice), tips or gratuities, bonuses, vacation pay, employment commissions, gross and insurable earnings of self-employed fishers, and all other remuneration you paid to employees during the year
- Taxable benefits or allowances
- Retiring allowances
- Deductions you withheld during the year
- Pension adjustment (PA) amounts for employees who accrued a benefit for the year under your registered pension plan (RPP) or deferred profit sharing plan (DPSP)
You are required to report income on a T4 slip for the year during which it was paid, regardless of when the services are performed or earned, or if the employee is deceased.
As per s. 5(1) of the Income Tax Act, which states: "a taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year."
If a payment is made in January 2018 for wages earned in December 2017, this amount will be reported on the 2018 T4, not on the 2017 T4.
There are, however, some types of income you should not report on T4 slips:
- if you paid pensions, lump-sum payments, annuities, or other income (including amounts paid to a proprietor or partner of an unincorporated business), see T4A – Information for payers
- if you paid fees (except for director fees), commissions, or other amounts to a non-resident for services rendered in Canada, other than employment situations, see Guide RC4445, T4A-NR – Payments to Non-Residents for Services Provided in Canada for information about filling out a T4A-NR return
- if you are an employer with construction as your primary source of business income, and you paid amounts to subcontractors for goods and services rendered in connection with construction activities, see Contract Payment Reporting System (CPRS)
- if you paid amounts from a retirement compensation agreement, see Guide T4041, Retirement Compensation Arrangements Guide for information about filling out a T4A-RCA return
When Do You File T4s?
T4 and T4A slips must be distributed, and T4 and T4A returns must be filed, on or before the last day of February following the calendar year to which the slips apply. If the last day of February falls on a Saturday or Sunday or public holiday, the tax slips and returns are considered on time if postmarked on the next business day.
Depending on the number of slips involved, employers can be penalized from $5 to $75 per day late, with a minimum penalty of $100 and a maximum penalty of $7,500.
Special Considerations for T4s
Fishing income and employment income can be reported on the same T4 slip or on separate T4 slips. Do not use code 78, 79, or 80 to report employment Income. Use box 14.
Reporting paid or payable self-employed fisher income depends on whether you are using the cash method or accrual method of accounting.
Seasonal Agricultural Workers Program
If you employ foreign workers under the Seasonal Agricultural Workers Program, enter code 15 in Box 29 – Employment code of the T4 slips for your employees.
If you pay a retiring allowance to a resident of Canada, deduct income tax from any part you pay directly to the recipient using the lump-sum withholding rates.
A retirement allowance includes payments for unused sick-leave credits on termination, and amounts individuals receive when their office or employment is terminated.
A retirement allowance does not include, however, salary, wages, overtime, legal fees, a superannuation or pension benefit, or payments for accumulated vacation leave not taken before retirement.
What Can Business Owners Do to Save Time on Preparing T4s?
The average small business owner spends 5-10 hours a week on their own books. There are benefits to outsourcing your bookkeeping and payroll, giving more time back to you to work on your business.
Even if you file your T4 slips on time, they can still be lost, have delivery issues, or even face late fees. If FBC does your payroll, it is e-filed with a confirmation received from the CRA that the T4 is received immediately.
Many business owners are unsure of where to report certain things, such as health premiums or taxable benefits. Having FBC do your payroll will eliminate this weekly concern and ensure that it is done accurately and on time.
FBC offers a direct deposit option for your payroll. First and foremost, the CRA is paid accurately and on time using this option, which reduces the headaches and government issues due to this automation.
Direct deposit also gives business owners less paperwork due to the elimination of cheques. Additional benefits are accuracy, efficiency, and employees paid on time.
If you’d like more information about how to simplify your payroll, add hours back into your week and generally make life less taxing, call our payroll product specialist, David McKenzie. 1-833-813-1541 or [email protected].