Canadian employers have the responsibility of paying their people. But it goes beyond just writing numbers on a check, and it can be very easy for new or small businesses to get lost in the complexity of payroll processing. But that’s ok! We understand there’s a lot to do, and that’s why we’ve put this guide together.
Businesses in Canada looking for long-term success need to manage payroll accurately from the beginning. This means compliance with the requirements of the Canada Revenue Agency (CRA), including payroll deductions (aside from businesses in Quebec, who will need to comply with different regulations). But what exactly are payroll deductions? What steps do Canadian employers need to take when processing payroll? Whether you’re a business owner looking to ensure you’re paying your people properly, or an employee trying to understand where your hard-earned money is going, we’ve put together this guide to help you effectively understand the payroll process.
What are payroll deductions?
Payroll deductions (or source deductions) are wages withheld from employees’ taxable income for the purpose of paying taxes (which are remitted, or paid to, the CRA), garnishments (paid to creditors, including, but not limited to the CRA), and benefits. Some deductions are voluntary, while others are mandated by the government and are required of employers, meaning an employer is liable if they fail to calculate and deduct it properly. The difference between employees’ gross income and net income is determined by these deductions. Put plainly, gross income is the wages an employee earns before deductions, and net income is the wages the employee actually takes home after deductions.
Both the business and the individual have income tax responsibilities, and the business takes care of the administration of these responsibilities throughout the year. When an individual starts a new job, they give their employer a TD1 form, and this document tells the employer a little bit about the individual’s income tax situation. The employer uses that information to calculate the employee’s income tax. At the end of the year, the employer will give the individual a T4 form, which the individual will use to file their personal income tax. The goal of a payroll calculation is to get the employee as close as possible to paying/owing $0.00 in federal income tax when they file.
Statutory (mandatory) deductions
These are the mandatory amounts that must be calculated and deducted from employees’ taxable income, then remitted to the CRA periodically based on the company's remitter type.
Employee Canadian Pension Plan (CPP)
A monthly, taxable benefit that replaces part of a person’s income once they retire. Every Canadian (outside of Quebec) over the age of 18 must contribute to the CPP. Employees pay half the required contributions, and their employer pays the other half. Self-employed Canadians must pay the whole contribution.
Employment Insurance (EI)
A program that provides temporary income support to people who have lost their jobs while they look for new employment. The EI program is intended to help Canadians focus on their job search, rather than focusing on finances.
Federal and Provincial Income Tax
Income taxes are collected at the federal and provincial/territorial level to pay for the government’s operating expenses and services. This federal income tax pays for things like the military, police force, libraries, and public schools.
Non-statutory (optional) deductions
Along with statutory deductions, some employers will provide benefits to their employees in the form of subsidies, resulting in additional premium amounts deducted from their wages. Examples include a subsidized phone plan or gym membership.
How to calculate taxes on my paycheque?
Tracking and calculating the income tax withholding may seem like a daunting task. But the CRA has an online calculator tool that can help calculate payroll deductions for you. A full how-to guide on using the payroll deduction calculator can be found on the CRA website.
Manually, an example calculation if an employee earns $200,000 per year (taxable) would look like this:
Dollars $0 to $50,197 = $50,197 total dollars at 15% tax rate = $7,529.55 tax due
Dollars $50,197 to $100,392 = $50,195 total dollars at 20.5% tax rate = $10,289.97 tax due
Dollars $100,392 to $155,625 = $55,233 total dollars at 26% tax rate = $14,360.58 tax due
Dollars $155,625 to $200,000 = $44,375 total dollars at 29% tax rate = $12,868.75 tax due
Total dollars taxable = ($50,197 + $50,195 + $55,233 + $44,375) = $200,000
Total tax due = $45,048.85
Keep in mind, the more employees a company has, the harder it is to manually calculate deductions for each employee. Imagine doing these calculations for every employee, every pay cycle. That's a lot of time! With payroll software (like Humi Payroll), CPP, EI, and income tax amounts are automatically calculated when a payroll is run, saving businesses a lot of time and effort.
The 5 steps to running payroll and payroll calculations online
No matter the size of a business, there are basic principles to follow in order to process payroll properly. If you’re in charge of payroll for your company, follow these 5 steps to get things going.
Step 1: Determine your contributor type
To run payroll, you’ll need to register for an account with the CRA. Before registering, determine what type of contributor you are: employer, trustee, or payer.
- Pays salaries, wages, bonuses, vacation pay, or tips to employees
- Provides taxable benefits to employees
- Authorizes a payment or causes a payment to be made for another person
- Administers, manages, distributes, or otherwise deals with another person's property, business, estate, or income
- Pays other types of income related to employment (e.g. pension, lump-sum payments, self-employed commissions)
For full definitions of each role, visit the CRA website.
Step 2: Open an account with the CRA
Any organization that conducts business in Canada must register with the CRA for a payroll program account. This account is required in order for an employer to make the appropriate remittances to the government. The account number is assigned to an employer, trustee, or payer of other amounts related to employment to identify themselves when dealing with the CRA. Register for an account on the CRA website here.
Step 3: Enter employees’ information
Before you start paying an employee, you’ll need their social insurance number (SIN) and a complete Form TD1, Personal Tax Credits Return. Once you obtain this information, set them up within your payroll account.
Step 4: Calculate deductions
Calculate payroll deductions and contributions manually or through the CRA deductions calculator.
Step 5: Remit deductions and complete year-end summary
To find out when you’re required to remit deductions to the CRA, you’ll need to determine your remitter type (i.e. quarterly, regular, threshold 1 accelerated, or threshold 2 accelerated). Your remitter type is based on your average monthly withholding amount (AMWA), and can be figured out by visiting the CRA website.
Finally, complete and file a year-end summary of all employees’ pay and deductions with the CRA.
Bonus step: Keep record
It’s critical to set up some sort of record-keeping for your payroll information. The CRA indicates that businesses should keep any supporting documents for six years in case they’re asked to provide them later. Storing these records can often be overwhelming; it’s a lot of important information to keep track of, but it’s necessary. That’s why a lot of companies choose to use software to organize this information.
Should I use software?
We’ve already shown you that it’s possible to manually calculate deductions, and in the early days of a business’ existence, it might make sense to store payroll information on your own. But as your business grows, more employees are hired, more paperwork piles up, and doing all of these things yourself can become cumbersome. Thankfully, there is software specifically designed to make the job easier.
Payroll software is used to manage and automate the payroll process, saving time and increasing accuracy. It not only helps the business, but employees as well, by ensuring their pay is always accurate and on time. This software is often continuously adapting and updating to consider new tax laws, regulations, and/or requirements, so you can always be certain that you’re compliant.
Get started with Humi
Humi is an all-in-one HR platform that helps you keep track of not only payroll, but benefits, recruiting, onboarding, performance management, and more. We’re designed to integrate your payroll with your HRIS, so you’ll never have to enter information into multiple, separate platforms again.
Humi Payroll is focused on moving away from paperwork and spreadsheets, while still making it easy to abide by government regulations and tax laws. We make life easier for your team by automatically generating paystubs to include the necessary deductions, every pay cycle. We’ll also keep record of your full payroll history for as long as you need it, so you won’t have to worry about security or amassing huge amounts of paperwork. And as a CRA approved payroll provider, we take on the burden of law and regulation compliance and accuracy.
Our payroll module includes:
- CRA remittances
- Automatic T4s and ROEs
- EHT calculations
- Payroll history
- Records and reporting
- Electronic paystubs
- Direct deposit
Ultimately, we’ll help you take care of your employees. To learn more, speak with our team today.