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What To Know About Payroll Deductions

If your business is growing and you are looking at hiring employees for the first time, there are a few things that you need to know. While it is best to hire a professional accountant to help you with your company finances, it is also important that you have a good understanding of the type of payroll deductions you are responsible for as an employer. First and foremost, the Canadian government requires you to sign up for a payroll program account if you pay salaries, bonuses, vacation pay, provide benefits for employees, or remit any remuneration such as a pension.

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What are payroll deductions?

A payroll deduction is an amount held back from an employee’s paycheque by the employer. This money is used for paying taxes, benefits like health insurance, or contributions to the Canadian Pension Plan. An employee’s income can be in the form of salary, commission, bonuses, business expenses such as a car allowance, or other sources of income. To start an employee on a payroll program, you need their social insurance number (SIN) and a completed TD1 form that can be found on the government of Canada website.

Payroll deductions employers are responsible for in Canada

As an employer, you are responsible for deducting income tax, Canadian Pension Plan contributions, and Employment Insurance premiums. If your organization asks that employees pay a portion of their health benefits, then this needs to be deducted from their payroll as well. When it comes to tax time, you must record your employee’s income and deductions appropriately on a T4 or T4A slip.

If your company resides in Quebec, the contributions differ from the rest of the country. In Quebec, employers deduct the Quebec Pension Plan (QPP) instead of the Canadian Pension Plan. The province also deducts its own provincial tax, the Quebec Parental Insurance Plan, and Employment Insurance premiums.

When collecting the deductions from an employee’s paycheque, it is best to keep that money in a separate account.

How to calculate federal, provincial, and territorial payroll deductions

When looking at what you need to deduct from an employee’s paycheque, it is best to start with the CRA payroll deduction online calculator. There are three different things you need to consider calculating:

1. Income tax: This amount changes based on where your business or employee resides. The CRA online calculator determines how much tax to deduct for your employee based on where they live and work.

2. Canadian Pension Plan: For employees between 18 and 69 you need to deduct Canadian Pension Plan contributions unless the employee lives in Quebec. You can find information about maximum contributions, exemptions, and any other useful information required on the Canadian Pension Plan page.

3. Employment Insurance premiums: You should be taking 1.4 times the insurable earnings of an employee off of their paycheque. There is no age limit requirement but, similar to the Canadian Pension Plan, once the annual maximum has been hit you no longer need to deduct the amount from an employee’s pay. If you offer employees a short-term disability plan then you may be eligible for a reduced rate.

There are some exceptions to deductions for employees where you don’t have to collect the Canadian Pension Plan or Employment Insurance Premiums. If an employee falls within any of the following brackets, you do not need to deduct these contributions:

  • If CPP considers your employee disabled
  • If your employee is over the age of 70
  • If your employee is between the age of 65 and 70 and provides you with a CPT30 form then they can file for a stop to the contribution

Steps for payroll in Canada

There are several steps you must take to start the process of calculating and taking the payroll deductions:

1. Create a payroll account

To get started, register with the government of Canada and create a payroll account. If this is your first time signing up for an account you need a registered Business Number (BN), which can be created through the CRA. Once you have a Business Number, you can simply add a payroll deduction account to your profile.

2. Gather employee information

Once you have created a payroll account, you need to collect some of the employee’s personal information in order to register them. This is done during the hiring process by asking the employee to fill out the TD1 form. As a general rule, you need the employee’s SIN number. Be sure to look up their SIN numbers. Ones that start with a “9” are typically not Canadian citizens or permanent residents and may not be allowed to work in the country.

3. Calculate and start the deduction process

You may need to sit down with an accountant for this process, though it is possible to do it on your own if you have a decent understanding of accounting. At the very least you need to know the employee’s salary, if there are any taxable benefits, and if they are eligible for any deductions. Next, you can determine their Canadian Pension Plan, Employment Insurance, and income tax deductions.

It’s also important to determine if your company has any other deductions. If your company offers health benefits that employees contribute to, these should also be deducted from their pay. As well as any company RRSP or TFSA-matching programs. Additionally, if your company offers a pension program, this is also deducted from your employee’s pay.

FAQs about payroll deductions

Are payroll deductions the same for all employees?

Payroll deductions are not the same for all employees. The actual contribution amounts employees pay for the Canadian Pension Plan and Employment Insurance benefits differ based on their annual salary. This is also the same for RRSP, TFSA, or Pension-matching programs as the amount paid is generally a percentage of the employees overall salary. Additionally, some employees may qualify for exemptions if they are of a certain age or have a disability.

What is an example of a voluntary payroll deduction?

A voluntary payroll deduction is an amount that an employee has volunteered to have deducted from their pay. A good example of voluntary payroll deductions are RRSP or TFSA programs. Some employers offer employees the option to contribute to a company RRSP or TFSA program. The money is deducted from the employee’s paycheque and put into an account. Often, the organization pays an additional portion of the person’s salary, which is also considered a taxable benefit. The benefit to the employee is that they don’t have to pay federal or provincial tax on this money since it comes off before all of the other deductions are made.

Another example of a voluntary payroll deduction is health benefit programs. Some companies offer employees various tiers or levels of health insurance they can pay into. For example, the cost for an employee to have Tier 1 health insurance may be less expensive out of pocket than a Tier 3 health insurance or benefit plan. Of course, this amount is determined between you and your company health insurance provider such as Canada Life, Manulife Financial, or Sun Life Financial. Typically, as an employer, you pay a portion (usually half) of this health insurance plan, which is not deducted or noted on the employee pay. The employee pays the other half. It is voluntary because the amount of coverage an employee chooses to pay for varies. Keep in mind, for an employee to opt-out of a health insurance plan they must sign a waiver and should have coverage with another provider. Be sure your employees understand the risks of not having health insurance before they opt-out.

How do I pay my CRA remittance?

Paying your Canada Revenue Agency remittance is quite simple. To do this you need to log into the financial institution your company does business with. Once there, look under the pay bills section and click the ‘add payee’ button. Once here start typing in CRA, you should have the following options appear:

  • Federal – Corporation Tax Payments – TXINS
  • Federal – GST/HST Payment – GST-P
  • Federal Payroll Deductions – Regular/Quarterly – EMPTX
  • Federal Payroll Deductions – Threshold 1 – EMPTX
  • Federal Payroll Deductions – Threshold 2 – EMPTX
  • Federal – Canada emergency wage subsidy repayment

Once you have determined the appropriate account, you simply input the correct 15-digit business number as your CRA account number.

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