Introduction: Understanding the Importance of Reviewing Federal Payroll Deductions
Hey fellow Canadian business owners! Before we get into the holiday hustle and bustle, it's a great time to do a little year-end planning.
You may already know that T4s must be filed by February 29. Once filed, the CRA will calculate each employee’s pensionable and insurable earnings, and if there are any discrepancies between that and what you’ve filed & paid, you may receive a PIER (Payroll, Income, and Employment Returns) Review.
The only time to fix these discrepancies is now - during your 2023 payroll year. So before the new year rolls in, you’ll definitely want to double check all of your payroll numbers, and make those fixes ASAP. We’ll tell you exactly what you need to look for in this quick guide.
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2. Reviewing tax withholding calculations against current regulations and rates3. Auditing benefit deductions and ensuring correct allocations2. Reviewing tax withholding calculations against current regulations and rates
What is a PIER Review and Why Would I Receive One?
The first thing you should know is that a PIER Review doesn’t mean the CRA is going to call you or come knocking on your door. Usually, it’s received electronically or by mail. They will tell you the details of their assessment as well as the amount you need to pay, and how to pay it.
If you don’t agree with the amount you need to pay, you’ll need to respond to their PIER Review with your amended totals and an explanation.
So why would they send you one in the first place?
There are a number of reasons why the CRA would flag your company for a PIER Review, including:
Random selection: Unfortunately, the CRA may choose your business for a PIER review randomly as part of its ongoing efforts to ensure tax compliance across a broad spectrum of businesses.
Anomalies or Discrepancies: If the CRA identifies inconsistencies or discrepancies in an employer's payroll information, it may initiate a PIER review. This can commonly include:
Problems reporting taxable benefits (automobile allowance, healthcare benefits, cell phone service, RRSPs and so much more)
Differences between your reported employee information (i.e. Social Insurance Numbers) and the information CRA has on file
Calculation errors on EI/CPP premiums (for example, you deducted too much or didn’t deduct enough)
High employee turnover: Businesses with high employee turnover or frequent changes in employment status may be subject to PIER reviews to verify that payroll information is consistently and accurately reported.
Complaints/Industry-Specific Review: The CRA may launch a PIER review based on complaints or tips regarding potential payroll irregularities. They also may target specific industries for reviews based on trends or recent concerns related to payroll compliance within those sectors.
The Consequences of a PIER Review and the Impact on your Business
Many businesses receive a PIER Review after filing their T4s. So if it's not that big of a deal, why should you bother reviewing and correcting your payroll deductions when you’re busy with other tasks at year end?
Well, as harmless as a PIER Review could be, these payroll deduction errors can flag your business and snowball into a full-blown audit risk. And nobody wants that!
Even worse, if you ignore the PIER Review, it's not just a slap on the wrist; we're talking interest and financial penalties that could sting your bottom line.
So keep your T4s hassle-free, stay on top of those payroll deductions, and avoid the headache of unwanted audits and penalties. Your business deserves a great reputation with the CRA!
Step-by-Step Guide to Conducting a Thorough Review of Your Federal Payroll Deductions
1. Evaluating employee information and verifying accuracy
The first place to look over when reviewing your payroll records is one of the simplest, but most overlooked items: the employee’s information. It’s assumed that once an employee is hired fills out their information, it shouldn’t change. But circumstances change and sometimes employees’ info will change as well.
Among the most commonly noticed changes would be for an employee’s name and address. You should also have your employees verify their phone number and email, in case they’ve updated anything.
Things like the Social Insurance Number normally wouldn’t change - but in the event of identity theft, they may have received a new SIN. Lastly, double check your employees’ ages as CPP deductions may change if your employee turned 18 or 65.
2. Reviewing tax withholding calculations against current regulations and rates
The next step is to verify you’ve deducted the correct amounts with the current rate set by the CRA. If you’re using QuickBooks Online, you can do this with a Payroll Summary by Employee report.
You’ll have to take the employee’s gross earnings and subtract the basic exemption amount, then multiply it by the current rate. Compare your figure with the employee’s CPP and EI year to date.
Be wary of maximum contributions - many employees with higher salaries will have hit this at some point in the year and you could have over-deducted. Learn how to fix over-deductions.
3. Auditing benefit deductions and ensuring correct allocations
Another really important step in your review will be determining if your employee is receiving taxable benefits, and if so, how to code them correctly for the T4. This is definitely something you’ll want to do now so you won’t be left scrambling in February when the T4s are due.
The CRA’s list of taxable benefits can be daunting - so we recommend auditing your employee benefits now.
Taxable benefits can include things like employer-paid life insurance premiums, cell phones, and personal use of a company car.
If you’ve determined your employee is indeed receiving a taxable benefit you’ll be putting that in box 14 of their T4 slip. Code 40 is typically used to report the benefit.
4. Correct any missed or incorrect deductions or exemptions
If you found errors in the calculation of your payroll deductions, now is the time to correct them, before year end. This way your T4s will be perfect when they are filed with the CRA, reducing your chance of PIER Review.
On your next payroll run, make the necessary corrections to get your numbers square. You may need to contact the CRA in the case of an over-deduction.
5. Updating payroll software and systems if necessary
Lastly, if you’ve found problems with your deductions and contributions, make sure to take action on troubleshooting the cause now, so that your 2024 payroll can be error-free.
Common sources of problems include not having up-to-date tax tables in your payroll software, or issues calculating exemption on paycheques out of the normal payroll cycle.
For example, software often takes into account the basic exemption and spreads it across each pay cycle. However, if you’ve issued your employee a separate paycheque in the same pay period, your employee is not entitled to this exemption again.
Another common error arises when employees hit their maximum contribution for the year, but payroll software (or manual calculation) continues to deduct despite this.
Conclusion
Taking the time to review your year-to-date payroll will certainly help you in the new year. Not only will you mitigate your risk of receiving a PIER Review, but you’ll be building trust with your employees.
We all work hard for our money - as business owners and as employees. Knowing that you, as the employer, are double checking all the numbers for accuracy will give your team a sense of security.
And if you find yourself struggling with your review or need CPP and EI calculations corrected, give us a call! A PIER Review is included free of charge in all of our payroll packages, as well as one-time clean-ups if you don’t need ongoing payroll service.