Payroll Deductions in Canada

Payroll Deductions in Canada – How much should you be paying?

Payroll.

For some, it’s a word of joy! It’s payday, after all.

For others (mainly business owners) it’s a frightening time that leads a lot of money leaving the business – and puts the business at risk if it’s not done properly.

However, many small business owners shouldn’t have to worry about payroll. They should be able to rejoice with their employees, too!

That’s why we wanted to put together a comprehensive guide to talk all about payroll deductions.

So, save this article for later, or reference it when you need it, and let’s dive into understand how much you should be paying for payroll deductions.

Starting Simple – What is Payroll?

Payroll in Canada refers to the process of calculating and managing employee salaries, wages, bonuses, and deductions. It is an important aspect of running a business, as it ensures that employees are paid accurately and on time. In Canada, payroll is subject to a range of federal and provincial regulations, including tax laws, employment standards, and labor laws.

Simply put, it’s how employees get paid.

Employers are also responsible for ensuring that they are complying with all applicable laws and regulations related to payroll, including keeping accurate records and providing employees with pay stubs that outline their earnings and deductions.

In addition, employers must remit payroll taxes and other deductions to the appropriate government agencies, such as the Canada Revenue Agency (CRA), on behalf of their employees. Failure to comply with these regulations can result in penalties and fines.

Pay stubs, deductions, and remittances are all topics that we’re going to be covering in this article, but it’s important to understand how they all come together to make payroll function for businesses.

Understanding Pay Stubs

The next important piece of payroll and payroll deductions are pay stubs. So, we want to break those down here.

A payroll stub, also known as a pay stub, is a document that employers provide to their employees along with their paycheck, which outlines the details of their earnings and deductions for that pay period.

The information included on a pay stub can vary depending on the employer and the requirements of the jurisdiction in which the business operates, but typically includes:

  • Employee information such as name, address, and employee identification number
  • Earnings information, including the employee’s gross pay, hours worked, and pay rate
  • Details of all deductions made from the employee’s paycheck, such as income tax, CPP contributions, and EI premiums
  • Information on any other deductions or benefits that the employee has opted for, such as retirement savings plans or health insurance premiums
  • Net pay, which is the employee’s total take-home pay after all deductions have been made

Pay stubs are used in business for several reasons.

First, they provide employees with a record of their earnings and deductions, which helps ensure transparency and builds trust between the employer and employee.

Second, they can be used to reconcile payroll accounts and ensure that all deductions and taxes are being calculated and remitted accurately.

Finally, pay stubs can also be used for tax reporting purposes, as they provide a detailed breakdown of an employee’s earnings and deductions throughout the year.

In Canada, employers are required by law to provide their employees with pay stubs, and failure to do so can result in penalties and fines.

What are Payroll Deductions?

Payroll deductions refer to the amounts that are withheld from an employee’s paycheck by their employer to cover taxes, benefits, and other authorized deductions.

These deductions are typically calculated based on the employee’s gross pay, which is the amount they earn before any deductions are made.

In Canada, there are four key deductions that employers are responsible for – that we’ll cover in the following section.

Payroll deductions are important because they help ensure that employees are contributing their fair share of taxes and other mandatory payments, such as CPP and EI.

They also help employees manage their finances by allowing them to spread out certain expenses over time, such as contributions to a retirement savings plan or health insurance premiums.

Employers are responsible for accurately calculating and remitting these deductions to the appropriate government agencies or benefit providers on behalf of their employees.

What are Employers Responsible for?

As we mentioned above, employers in Canada are responsible for four key payroll deductions, that are all shown on an employee’s pay stub.

These four deductions include:

  1. Canadian Pension Plan
  2. Employment Insurance
  3. Federal Income Tax
  4. Provincial and Territorial Income Tax

CPP Deductions

Employers in British Columbia are required to deduct Canada Pension Plan (CPP) contributions from their employees’ paychecks and remit them to the Canada Revenue Agency (CRA) on behalf of their employees.

The amount of CPP contributions that employers are required to deduct depends on the employee’s earnings and the CPP contribution rates set by the federal government.

As of 2023, the CPP contribution rate for employees and employers is 5.95% of the employee’s gross pay, up to a maximum annual contribution of $3,166.45 for both employees and employers.

This means that if an employee earns $50,000 per year, the employer would be required to deduct $2,975.00 in CPP contributions from the employee’s paychecks over the course of the year.

It is important for employers in British Columbia to accurately calculate and remit CPP contributions on behalf of their employees, as failure to do so can result in penalties and fines from the CRA. Employers must also keep accurate records of CPP contributions and provide employees with pay stubs that outline the amount of CPP contributions that have been deducted from their paychecks.

EI Deductions

Employers in British Columbia are required to deduct Employment Insurance (EI) premiums from their employees’ paychecks and remit them to the Canada Revenue Agency (CRA) on behalf of their employees.

EI is a federal program that provides temporary financial assistance to employees who lose their jobs, become sick or injured, or take time off work to care for a family member.

The amount of EI premiums that employers are required to deduct depends on the employee’s earnings and the EI premium rates set by the federal government.

As of 2023, the EI premium rate for employees is 1.62% of their insurable earnings, up to a maximum insurable earnings amount of $63,500. This means that if an employee earns $50,000 per year, the employer would be required to deduct $810.00 in EI premiums from the employee’s paychecks over the course of the year.

Employers in British Columbia must also pay EI premiums on behalf of their employees. The employer EI premium rate is 1.4 times the employee rate, or 2.268%, up to a maximum insurable earnings amount of $63,500.

This means that for an employee earning $50,000 per year, the employer would be required to pay $1,140.00 in EI premiums over the course of the year.

It is important for employers in British Columbia to accurately calculate and remit EI premiums on behalf of their employees, as failure to do so can result in penalties and fines from the CRA. Employers must also keep accurate records of EI premiums and provide employees with pay stubs that outline the amount of EI premiums that have been deducted from their paychecks.

Federal Income Tax

Federal income tax payroll deductions are amounts that Canadian employers are required to withhold from their employees’ paychecks and remit to the Canada Revenue Agency (CRA) on behalf of their employees.

These deductions are based on the employee’s taxable income and are calculated using the federal income tax brackets and rates set by the federal government.

As of 2023, the federal income tax brackets and rates for employees are as follows:

  • 15% on the first $49,020 of taxable income
  • 20.5% on the portion of taxable income over $49,020 up to $98,040
  • 26% on the portion of taxable income over $98,040 up to $151,978
  • 29% on the portion of taxable income over $151,978 up to $216,511
  • 33% on the portion of taxable income over $216,511

For example, if an employee earns $60,000 per year, the employer would be required to deduct $7,869.00 in federal income tax over the course of the year, based on the applicable tax rates and the employee’s taxable income.

It is important for employers to accurately calculate and remit federal income tax deductions on behalf of their employees, as failure to do so can result in penalties and fines from the CRA.

Employers must also provide employees with pay stubs that outline the amount of federal income tax that has been deducted from their paychecks, along with any other payroll deductions or benefits.

Provincial Tax

In addition to federal income tax, British Columbia employers are also required to deduct provincial income tax from their employees’ paychecks and remit them to the British Columbia Ministry of Finance on behalf of their employees. Provincial income tax rates are set by the government of British Columbia and are based on the employee’s taxable income.

As of 2023, the provincial income tax brackets and rates for British Columbia employees are as follows:

  • 5.06% on the first $42,184 of taxable income
  • 7.7% on the portion of taxable income over $42,184 up to $84,368
  • 10.5% on the portion of taxable income over $84,368 up to $97,311
  • 12.29% on the portion of taxable income over $97,311 up to $117,623
  • 14.7% on the portion of taxable income over $117,623

For example, if an employee in British Columbia earns $60,000 per year, the employer would be required to deduct $3,593.20 in provincial income tax over the course of the year, based on the applicable tax rates and the employee’s taxable income.

What are other types of Deductions?

In addition to federal and provincial income tax and Employment Insurance (EI) premiums, there are several other common types of payroll deductions that may be present in Canada and British Columbia, depending on the employer and the employee’s specific circumstances.

Some examples of these deductions include:

  • Canada Pension Plan (CPP) contributions: Similar to EI, employers and employees are required to contribute to CPP, which provides retirement, disability, and survivor benefits. CPP contributions are based on the employee’s earnings and the CPP contribution rates set by the federal government.
  • Registered Retirement Savings Plan (RRSP) contributions: Employers may offer RRSP contributions as part of their employee benefits package. RRSP contributions are a tax-deferred way for employees to save for retirement, and employers can contribute to their employees’ RRSP accounts on a pre-tax basis.
  • Union dues: If an employee is part of a union, their employer may be required to deduct union dues from their paychecks and remit them to the union on their behalf.
  • Medical and dental benefits: Employers may offer medical and dental benefits as part of their employee benefits package, which may include deducting employee contributions from their paychecks.
  • Repayment of payroll overpayments: If an employee is accidentally overpaid, their employer may deduct the overpayment amount from future paychecks until the amount is repaid.
  • Garnishments and legal deductions: Employers may be required to deduct a portion of an employee’s wages to satisfy a court-ordered garnishment or other legal obligation, such as child support or alimony payments.

It’s important for employers to accurately calculate and remit all required payroll deductions on behalf of their employees. Failure to do so can result in penalties and fines from the relevant government agencies or legal authorities.

Employers must also provide employees with pay stubs that outline all payroll deductions and benefits.

What Cannot be Deducted?

Under the British Columbia Employment Standards Act, there are certain deductions that employers are not allowed to make from an employee’s pay without their written consent. These include:

  1. Deductions for faulty work or cash shortages.
  2. Deductions for losses due to the employer’s business expenses.
  3. Deductions for the employer’s operational costs.
  4. Deductions for uniforms or other items required for work.
  5. Deductions for tools or equipment required for work.

Employers must obtain written authorization from their employees before making any deductions not specifically allowed under the Employment Standards Act. Any unauthorized deductions made by an employer can result in penalties and fines.

How much should be deducted?

Putting together the last few sections in this article, it’s clear about what employers should be deducting from payroll.

However, to properly calculate this, employers must take into account the employee income, the hours worked, and then all of the deductions (including non-standardized deductions).

There are two best ways to calculate this number:

  1. To use an online calculator from the Government of Canada or CRA.
  2. Work with an accountant or bookkeeper who knows how to efficiently and accurately calculate deductions.

What are Employer’s other Responsibilities?

Beyond the calculation of payroll deduction amounts, employers are also responsible for payroll remittances.

Payroll remittances are the process of submitting payroll deductions, such as income tax, Employment Insurance (EI), Canada Pension Plan (CPP) contributions, and other deductions, to the appropriate government agency or authority.

Employers are responsible for accurately calculating and remitting these deductions on behalf of their employees.

In Canada, payroll remittances are typically submitted to the Canada Revenue Agency (CRA) on a monthly or quarterly basis, depending on the employer’s payroll size. The remittances must be filed electronically or on paper using the appropriate forms provided by the CRA.

To process payroll remittances, employers first need to calculate the total amount of payroll deductions that they need to remit for each employee.

This involves calculating the amount of income tax, CPP contributions, and EI premiums that need to be deducted from each employee’s pay, as well as any other deductions, such as union dues or benefit contributions.

Employers then need to submit the total amount of deductions, along with their own contributions, to the CRA before the deadline.

Employers who fail to accurately calculate and remit their payroll deductions on time may be subject to penalties and fines from the CRA.

As such, it’s important for employers to have accurate payroll systems in place and to work with experienced payroll providers or accountants to ensure compliance with all payroll remittance requirements.

Things to be wary of

It’s been mentioned throughout this article, but payroll is a highly sensitive topic among both employees and the CRA.

If deductions, remittances, and payroll amounts are not properly accounted for and reported on, employers can land themselves in hot water with the CRA.

As such, it’s important for small businesses and business owners to be on top of their payroll deductions and remittances.

One of the best ways to take care of deductions and remittances is to work with an accredited and certified bookkeeper or accounting company.

At Valley Business Centre – Bookkeeping & Payroll, we have plenty of experience when it comes to taxes, payroll deductions, remittances, and how to organize these systems for you for the future.

For over 30 years, Valley Business Centre – Bookkeeping & Payroll has been providing comprehensive bookkeeping, tax, and remote bookkeeping services to our clients in Whistler, Squamish, the Sea to Sky Corridor and metro Vancouver B.C. areas. Valley Business Centre provides reliable and effective services to all clients.

Disclaimer

This article is written for informational purposes only. It is current at the date of posting and changes to laws and regulation may result in the information becoming outdated. It is not intended to provide legal, tax, or financial advice. It is recommended that readers get advice from a tax professional before making any final decisions.

 

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