Many of the discussions regarding taxation revolve around tax deductions and tax planning. However, there is also the area of payroll taxes to consider, specifically the process in which they are calculated and paid to the government.
The calculation of salaries and payroll deductions is a tedious task which involves risk and room for error. At first, many clients are convinced to simply handle payroll themselves through the Canada Revenue Agency (CRA) Online Calculator and an Excel spreadsheet. I agree with this process only at the start-up stage of a practice where you, the medical professional, are the sole employee. However, as your practice expands and you employ more staff, this process becomes more tedious and prone to error. It is best to streamline the payroll process as early as possible, so that errors, interest, penalties, and back and forth correspondence with the CRA can be avoided.
By outsourcing your payroll, this process can be more efficient, simple, and cost-effective.
The answer is simple, outsource your payroll process. To understand the why, we review the four methods of completing payroll:
- Manual: A manual payroll process is the traditional payroll process which involves pen and paper, tax tables/CRA Online Calculator, and a spreadsheet. This process is time consuming, heavily prone to error (which then leads to issues with the CRA), and costly given the time value spent by the practice owner.
- Accountant: Having your accountant complete the payroll process will ensure that payroll is completed by a professional who has a sound knowledge of accounting and tax principles. The practice owner is able to free-up more of their time to run their practice with this method. However, this is the most costly of the four methods.
- Payroll Software: Accounting software, such as Simply Accounting, have versions which include a payroll module that assist in performing every action needed by the payroll process. However, this method requires a professional with accounting software experience to take full advantage of its efficiency. This method is moderately costly relative to the other methods.
- Payroll Outsourcing: This involves a third party (outsourcing company such as Ceridian) in the calculations of salaries, wages, payroll tax calculations, remittances to the government (via electronic payment), and year-end T4 preparation. This method is the most cost effective, efficient, and simple for any professional practice. In fact, T4 slips at year-end come in at a cost of $2.50 each. Yes, you read that correctly, two dollars and fifty cents per T4 slip. By outsourcing payroll, the process runs like a well-oiled machine.
This editions article “Payroll: On Route to Efficiency” presents a situation where a client was able to reduce their payroll costs by 43% by outsourcing payroll.
In the article Cash Flow is King, I presented KCPA’s experience with Jennifer Benoit (the real name has been changed for confidentiality purposes), a chiropractor, operating her own health & wellness clinic. Specifically, we presented how she was able to understand her business’ true performance by KCPA presenting her with a monthly cash flow statement. In this edition we focus on how the outsourcing of Jennifer’s payroll process resulted in a more efficient process, and a significant reduction in costs.
At my initial meeting with Jennifer, I had gone through a list of questions I had prepared in order to understand her business’ current processes and identify areas of improvement. When it came to payroll, Jennifer responded, “I have my front-desk assistant prepare the payroll from the CRA online calculator, summarize all the deductions and wages in a spreadsheet, I review everything, and write the cheques for employees and to the government”. Next, I asked her “Who is preparing the T4 slips?” Jennifer replied, “Well, I have the bookkeeper I use prepare them, although they were filed late last year, and there were a couple of errors with the employee information, which caused us some issues”. Jennifer said she works hard to keep her business running smoothly, however, with payroll and tax filings, she never really feels at ease, especially at year-end. “I just want payroll to be taken care of, and taxes and T4’s to be filed on time and correctly”, she said. This is where KCPA was able to make some recommendations to change her payroll process into a streamlined and cost-effective system.
Over the years, I have observed that some professionals in Calgary have not been informed or are misinformed regarding the outsourcing of payroll. When I talk to professionals about payroll outsourcing, they usually tell me; they had not been informed about this type of service, thought it is only available to large corporations with hundreds of employees, or immediately assume it will add to costs without providing additional value. The reality is that the outsourcing of payroll is an extremely cost effective function that streamlines the payroll process, is available to small businesses and professionals, and provides value by reducing preparation time, utilizes electronic payments, and files taxes and T4 slips well before their filing deadlines.
In order to clearly the see the benefits; we discuss the advantages and disadvantages of the payroll methods applicable to this situation – Manual vs. Payroll Outsourcing (Payroll software is not relevant in this case as Jennifer had no control over which accounting/bookkeeping software being used or how it was being used).
As discussed above, Dr. Benoit was using a manual payroll process. She was able to maintain full control over all aspects of the payroll process, except for the preparation of T4 slips — this is usually the case with businesses using a manual system. As evidenced from the discussion with Jennifer, this method is prone to error and late filing risk. The time spent in this process is approximately 3 hours a month. Specifically, the front-desk assistant spends 2 hours a month prepping and organizing all the information at an hourly rate of $20/hr. The owner-manager spends 1 hour a month reviewing the information at an hourly rate of $120/hr (this is how much revenue generation time she sacrifices by reviewing payroll). Therefore, the total monthly cost of this system is $160. At year-end the cost to prepare T4 slips for the employees was $250. Total annual cost for this method was $2,170.
After analyzing the current payroll situation, I recommended that Jennifer outsource her payroll to Ceridian. Outsourcing would reduce the risk of error and late filing penalties to almost nil. “What does it cost?”, she asked. For three employees, for two payroll cycles a month — the cost was $52/month. What was included in that cost was the following: calculation and remittance of all payroll taxes and deductions (CPP, EI, and tax), electronic direct deposit of wages into employee bank accounts, and delivery of two payroll reports for the month outlining all deductions for employees, payments, and a summarized journal entry for the accountant to record. At year-end, T4 slips are prepared at a cost of $2.50 each ($7.50 for 3 T4 slips). “Wow, that’s pretty good!” she said. Next, she asked “What will my staff be responsible for?” Her front-desk assistant will be responsible for entering pay period information such as wages, hours, and other changes (if necessary) into the online interface, and submitting the report online. Before the payroll is processed, a payroll preview report will appear with any warnings of potential errors that exceed pay limits pre-defined by Jennifer. If everything looks good, simply submit the payroll, and leave the rest to Ceridian.
A review of the time value spent by outsourcing payroll is approximately 1 hour a month for the front-desk assistant, and 0.25 hours a month for the owner-manager. At year-end the cost to prepare the T4 slips for the three employees is $7.50. Total annual cost for this method is $1,231.50. This results in a 43% reduction in cost!
Additional value has been added through streamlining the payroll process, all records are prepared professionally, all payroll data is available online and backed up, and all payments are completed electronically. Jennifer now has more time available to run her clinic, and the peace of mind to run it effectively.
Jennifer was very impressed with the payroll outsourcing method, “Great! I’ll call them next week so we can get rolling on this”. Within three weeks, she was on-board with Ceridian. Ceridian arranged to train her staff on the online user-interface before the first pay-cycle, and at year-end, her employees’ T4 slips were prepared and mailed to her by January 4th (this is well ahead of the February 29th deadline).
In summary, outsourcing payroll for your practice is the best alternative. In my opinion, no accountant, payroll software, or manual process can provide the efficiency, high-quality documentation, ease, cost-effectiveness, and streamlined processing that a payroll outsourcing company can provide.
There are other payroll outsourcing companies providing the same service, however, in my experience Ceridian provides the most user-friendly online interface and the best documentation for record-keeping purposes. I would encourage you to visit their website.
KCPA has no financial interest with Ceridian, they are recommended simply because they provide an excellent payroll service to clients.
This material is provided for general information only and is subject to change without notice. While every effort has been made to compile this information from reliable sources, no warranty can be made as to its accuracy or completeness. As it is impossible to include all situations, circumstances and exceptions in an article such as this, a further review should be done by a qualified professional within the context of your circumstances. KCPA, or any organization, or any individual involved in the preparation or distribution of this article accept no contractual, tortuous, or any other form of liability for its contents or for any consequences arising from its use.