Payroll is an important part of running a business in Canada. Whether you employ one member of staff or one hundred, you still have to pay them a salary and they still have to pay taxes on that salary. Collecting and paying that tax is the responsibility of the employer so understanding Canadian payroll deductions is vital.
So, what deductions must be made from payroll and how do you do it? These are the 3 main deductions that must be made:-
- CPP or Canadian Pension Plan deductions. Full guidelines and tables are available from the Canada Revenue Agency. First you have to determine the correct provincial or territorial table to use for deductions. This will depend upon the area that your employee actually reports for work in. Follow the calculation instructions given by the CRA and/or your financial advisor to work out how much of a deduction you have to make from your employees salary.
- EI or Employees Insurance deductions. Each year the CRA provides a figure for maximum insurable earnings and premium rates. For 2012 the maximum insurable earnings figure is $45,900. You cannot calculate your employees EI on any figure higher than this. The premium amount is figured by multiplying the insurable salary by the relevant yearly premium rate. However, there is also a maximum amount of contributions that can be made in any one year and once this figure has been reached you must stop deducting contributions from salaries. As an employer, your insurance payments should be 1.4 times the amount of your employee deductions, for example, our employee deductions for the month are $250 then yours will be an additional $350, making the total payable to the revenue agency $600.
- Income tax deductions. It is your responsibility as an employer to ensure that the correct income tax deductions are made from salaries. All employees must complete form TD1 at the start of their employment. This will give you, as the employer the information required to calculate the income tax amount to be deducted. All information and calculation tables are available through the CRA or your financial advisor.
The process of making the correct payroll deductions is not a simple one and the proper guidelines and tables, provided by the Canada Revenue Agency, must be followed. If you discover that you have taken more or less than the required amount each month from your employees you must rectify the situation as soon as possible. Underpayments will attract interest and penalties. Overpayments must be paid back to the employee and a correction made on your return in a future pay period.
Getting your payroll deductions correct is absolutely essential as mistakes can often be extremely costly, leading to interest and penalties that you don’t need to pay. It is advisable to place the money for all of these deductions into a separate account, as and when they are calculated. This will avoid any shortfall or lateness of payments as they fall due. Please consult with your financial advisor or the CRA for more information.