What are payroll deductions, and what do they mean for your business? As a business owner in Canada, running your business as your own boss could entail challenges, especially if you are trying to manage everything on your own.
Once you've set up your business, hired qualified employees, your responsibility is to pay them promptly and appropriately. But that is just one of your expected responsibilities. You still have other essential things to worry about as a business owner in Canada.
Knowing how to calculate and process payroll deductions is crucial for your business and must be navigated carefully.
In business, learning from your mistakes is great, but there are mistakes that can be consequential to your business' operation and growth.
As an incorporated business owner in Canada, it is your responsibility to calculate, report, and submit taxable payroll deductions and withholdings from your employees' incomes to the Canada Revenue Agency (CRA).
Whether you are a new employer looking forward to understanding payroll deductions and remittances or you have been running your payrolls yourself and looking for a better way to avoid violations, this article will help you.
In this article, we will answer the most important questions on payroll, payroll deductions, and payroll remittances.
What is a payroll deduction?
For an incorporated business in Canada, payment of taxes, garnishments, or benefits is important. Any amount withheld from employees' income to cover these mandatory payments to the Canadian Revenue Agency (CRA) is called payroll deductions.
What are standard payroll deductions in Canada?
As a business owner in Canada, it is required by law to withhold the following standard payroll deductions before issuing an employee's paycheck:
- Canada Pension Plan (CPP) contributions
- Employment insurance (EI) premiums
- Federal, provincial, or territorial income tax
Canada Pension Plan (CPP) contributions:
Canada Pension Plan is one of the three major standard payroll deductions in Canada. This deduction is part of the Canadian retirement income system that ensures that workers have a retirement benefit for the rest of their lives when they retire.
Deduction for CPP is statutory or legislated in Canada. Only businesses run in Quebec are an exception. Quebec employers have to deduct contributions for the Quebec Pensions Plan instead of the CPP.
Whether your business is run in or outside of Quebec, you still need to deduct a pension plan and remit it to the appropriate agency in your territory.
As an employer, you may be required to pay half of the required CPP contribution while your employee pays the rest.
CPP benefits are based on how much you've contributed and how long you've been making contributions when you become eligible to collect benefits.As an employer, CPP should be deducted if an employee is between 18 and 69.
Employment insurance (EI) premiums:
For unprecedented circumstances, the Employment Insurance is deducted to help counter immediate or short-term employee's needs. Unlike the Canada Pension Plan, the EI does not have age restrictions. The employment Insurance deducted from employees' wages can help in specific events like;
- Skill acquisition
- Caring for a newborn or adopted child
- A critically ill or injured person's case
- A family member who is seriously ill with a significant risk of death.
As an employer, EI should be deducted on employees' income on each dollar of insurable earnings up to the yearly maximum. When your employee EI deductions reach the yearly maximum amount, you stop deducting them.
As an employer, you need to understand that not all payments you give to employees are subject to Employment Insurance (EI).
To make things a lot easier, you can use the CRA's Employment Insurance calculator to know the appropriate amount you need to deduct for any pay period.
Federal, provincial, or territorial income tax:
Income taxes in Canada make up most of the Government of Canada's annual revenues and the governments of the Provinces of Canada. So, it is a crucial deduction that must be done on both business and personal income.
The total federal tax deducted from your employee's payroll will be determined by their claim amount on their form TD1. TD1 is a personal tax credit return form that new employees are expected to fill and give to their employer for proper documentation.
The TD1 form is necessary to determine the amount of tax to be deducted from an individual's employment income or other income, such as pension income.
There are federal and provincial TD1 forms used to deduct income tax; therefore, you need to be sure about Canada's income tax and in your province before withholding any amount.
To know the right income tax amount to deduct from your employees' payroll, the provincial or territorial tables for the province or territory where your employees report to work can come handy. The easiest way to get adequate information is through the CRA's online calculator, which will calculate all the other payroll deductions you need to make. You can also find all the payroll deductions tables that you need on the CRA's payroll page.
Paying your employees' wages, deducting CPP, EI, and income tax, and remitting it to the appropriate agency, the CRA, may become a lot of work for you, especially when your business starts to grow quickly.
At some point, you may want to start outsourcing your payroll processing to third-party payroll service providers like Push who use the latest software algorithm to process employees' payments, make appropriate payroll deductions and remit them to the CRA.
How do I calculate payroll deductions?
Calculating payroll deductions can be done in two ways; manually or automatically. There are more tendencies of errors with using the manual method. Luckily enough, there are reliable software and programs from Canada Revenue Agency and other third-party payroll service providers such as payroll software that can automate your calculations and save you the hassle.
Depending on your business's nature, there could be other payroll deductions you may need to process apart from the standard deductions, and these can become overwhelming with chances of errors reoccurring. Hence, the need to get the work off your neck by hiring qualified payroll service providers.
How to calculate Canada pension plan deduction:
- Calculate the basic pay-period exemption - $3,500 ÷ 52 = $67.30 (do not round off)
- Step 2: Calculate the total pensionable income - $500 + $50 = $550
- Deduct the basic pay-period exemption from the total pensionable income - $550 – $67.30 = $482.70
- Calculate the amount of CPP contributions - $482.70 × 5.25% = $25.34
- Calculate the amount of CPP contributions you have to pay - $25.34 × 2 = $50.68
How to calculate E.I deductions:
- Get the employee's insurable earnings.
- Get the correct employee's EI premium rate for the year
- Multiply the amount in step 1 by the rate in step 2
As of January 1, 2021, the maximum yearly insurable earnings amount is $56,300, which means your employees can receive a maximum amount of $595 per week. Calculating EI deductions can be overwhelming since it is based on several variables like the number of hours/weeks worked, regional unemployment rate, pay rate, EI history, etc.
Although most employers would say EI is 55% of your average insurable weekly earnings, up to a maximum amount, Service Canada says benefits are calculated using your "best weeks" of gross earnings.
To calculate your employee's EI premiums using the manual calculation method, follow the above listed steps. The result is the EI premiums to be deducted for your employee.
Note: The EI premiums you deducted from your employees for the month * 1.4 = total amount you'll remit for EI premiums to the CRA.
How to calculate federal income tax deductions:
To calculate federal income tax manually, you need to know the federal income tax brackets in Canada.
Each province and territory also charges income tax in addition to the federal income tax. Their rates and tax brackets vary.
The chart below shows Quebec's tax rates for 2020.
How to calculate federal and territorial income tax:
You are an employer in Yukon, and you have an employee who earns $1,018 a week in 2021. Your employee has a federal claim code one (1) and a territorial claim code one (1).
To determine your employee's federal tax deductions, you look at the weekly federal tax deductions table and find the range for his/her weekly salary, which is 1012-1020. The federal tax deduction for $1,018 weekly under claim code 1 is $102.80.
To determine Your employee's territorial tax deductions, you use the weekly territorial tax deductions table. In the Yukon tax deductions table, the territorial tax deduction for $1,018 weekly under claim code 1 is $44.15.
Your employee’s total tax deduction is $146.95 ($102.80 + $44.15). This amount of taxes will be included in your remittance to the CRA.
How do I pay remittances?
Before you can be eligible to pay remittances as an employer in Canada, you must have registered your business, confirmed your business number, and opened a payroll account with the CRA.
After all necessary information has been gathered from your employees through the TD1 form and all deductions have been accurately deducted, you can then go ahead with paying remittances to the CRA.
As an employer, you can pay remittances electronically or through remittance vouchers, which means your statement of account will also be received by mail.
In case you are a new remitter and do not have a remittance voucher, you should include the following information when making your payment:
- A text that you are a new remitter,
- the remitting period your remittance covers (if your remittance covers more than one period, provide a detailed breakdown)
- your payroll program (RP) account number
- your business' complete legal name, address, and telephone number
Once you have paid your first remittance, your remitter type will be changed to quarterly or accelerated remitter, and this means that you have less paperwork to do in the future.
You do not need to go through all this stress at all if you think of outsourcing your payroll deductions and remittances to professional payroll service providers like Push.
What else do I need to know?
It is important as a business owner to know what source deductions are, what information you need to deduct them and how to remit them appropriately to the CRA without incurring any penalty fees on your business. On the other hand, it may not be necessary to process your payroll yourself, especially if you have a large business with many employees of different job descriptions.
You can make the CRA do your payroll processing for you if you feel you can afford their fees or outsource to other professional payroll service providers like PUSH, who have built reputability among small and large business owners in Canada.
You don't want to end up paying $1,000 to $25,000 as penalties for noncompliance to Canadian Revenue Agency when you can have experts in payroll processing do the hard work for you while you focus on other important business activities. You can learn more about the details for particular offences from the CRA's official website.