Payroll tax is an essential part of running a business, no matter whether you employ just one person or a thousand. Once you have set up and started your business and started to employ staff to work for you, you need to set up a payroll account with the Canada Revenue Agency. This is for the purpose of remitting your payroll taxes to the revenue authority.
So, what is payroll tax? These are taxes that you must deduct from salaries that are paid to your employees and that you as an employer must also make. There are 3 parts to payroll tax – income tax, CPP, or Canada Pension Plan deductions and Employer Insurance deductions.
Income tax must be deducted from each and every employee working for you. In order to determine exactly what rate of tax you should be deducting you must first use the provincial and territorial tables supplied by the CRA. There are full guidelines and a calculator supplied on the CRA website for your to be able to calculate the correct amounts of income tax from each employee. There is no age limit for deducting this tax and there are no employee contributions required.
Canada Pension Plan deductions are calculated differently as you do not use the entire amount of earnings. Instead, there is an exempt amount that cannot be used and a maximum yearly amount of deductions per employee that can be made. Once that maximum has been reached then deductions must stop. You, as an employer must contribute the same amount of your employee contributions. It is essential that the CPP calculations are correct as mistakes can have a costly effect, both on you and on your employees.
The third payroll tax is Employer Insurance. This is calculated on the entire salary of your staff, up to a yearly maximum amount. This is different every year and guidelines for maximum amounts are published each year by the Canada Revenue Agency. As an employer, you must contribute 1.4 times the amount of your employee contributions.
So that, in a nutshell, is payroll tax. It is a very complex process and must be done accurately and on time as and when due. Any deductions you take from your staff salaries should be placed into a separate bank account so that, as the time falls due for each payment, there are no shortfall or non-payment issues. Interest and penalties will apply to any payments that are not made or are submitted late.
It is highly advisable to use the services of a professional financial body to assist you with your payroll deductions, along with the publications and guidelines that the Canada Revenue Agency issue each and every year. However, it is your responsibility to ensure that all the correct information is passed to your accountant in good time in order for them to be able to calculate the correct amounts. Any penalties or interest that occurs is payable by you as the business and not your accountant.
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