As a small business owner, you have a lot of responsibilities, including your obligation to pay your employees. Just writing that paycheque isn’t enough, though — you also have to withhold your employees’ payroll deductions, remit them to the Canada Revenue Agency (CRA), and take care of more paperwork than you might expect.
Payroll deductions include Employment Insurance (EI) premiums, Canada Pension Plan (CPP) contributions and income tax. In rare cases, you may also need to withhold child support or other wage garnishments from your employees’ paycheques. Luckily, the process is relatively straightforward, and with the right information and tools, you can easily handle payroll and deductions.
How to Do Payroll
You can break payroll down into a handful of steps:
- Open a payroll account with the CRA.
- Have employees fill out a TD1 form.
- Calculate payroll deductions and withhold them from your employees’ cheques.
- Remit payroll deductions, EI premiums and CPP contributions to the CRA.
- Report everything on a T4 or T4A form at the end of the tax year.
Opening a Payroll Account
To set up a payroll account, you need a business number (BN). If you’ve already registered for the goods and services tax/harmonized sales tax (GST/HST) program or the import-export program, you have a business number. But in other cases, you need to get one.
You can register online at Business Registration Online. You need your Social Insurance Number (SIN) and a copy of a recently filed income tax return to verify your identity. Alternatively, you can apply for a BN through the mail using Form RC1 (Request for a Business Number) or call the CRA at 1-800-959-5525.
Once you have a BN, you can sign up for the payroll account through My Business Account. Then, you can file returns, respond to notices, view remitting requirements, check your balance and take care of payroll essentials. If you want an accountant or anyone else to access your payroll account, they need to register through the Represent a Client service.
Filling Out Form TD1
To determine how much income tax you should withhold from your employees’ cheques, you should have them fill out Form TD1 (Personal Tax Credits Return). All new hires need to fill out this form, but you can also use it for employees who want to change their claims or increase their source deductions.
Start with the federal TD1. Then, if an employee claims more than the basic personal amount, you also fill out the provincial or territorial TD1. For instance, if they note a dependent, you need to have the employee fill out the provincial or territorial form.
Individuals with multiple employers should not claim personal tax credit amounts on multiple TD1 forms. Instead, they should check the box next to the line “more than one employer” on the back of the form. Then, they should skip filling out lines 1 to 12 on the front of the form and write a zero on line 13.
Review the information on the form to ensure it’s correct. Double check your employees’ SINs to make sure they match their photo ID. When you’re done, you don’t have to send this form to the CRA. You simply keep it for your records and use it to help you calculate payroll deductions, but if the CRA requests to see these forms, you need to present them.
Calculating Payroll Deductions
To calculate your employees’ payroll deductions, you first need to look at their earnings. In addition to taking cash payments into account, you may also need to add in other non-cash benefits. For instance, if you provide room and board, that’s considered a taxable benefit.
You need to add the value of that benefit to your employees’ pay before calculating payroll deductions. Then, you can calculate how much income tax to withhold by using the Payroll Deductions Online Calculator or Guide T4127 (Payroll Deductions Formulas).
You also need to deduct CPP or Québec Pension Plan (QPP) contributions from your employees’ cheques. All employees between the ages of 18 and 70 must make these contributions. Remember, you must also match your employees’ CPP contributions. Finally, you need to calculate EI premiums and withhold them from your employees’ payment, and you also need to remit 1.4 times each employee’s payment.
Remitting Payroll Deductions
After you write your employees’ cheques, you need to remit the payroll deductions you’ve withheld by the 15th of the following month. For instance, if you pay your employees in April, you need to remit the deductions by May 15.
You can pay online through My Business Account by using the My Payment portal or by setting up a pre-authorized debit from your bank account. With an original remittance voucher, you can also make a payment at your bank or mail a payment to the CRA.
Completing T4 Forms
After every tax year, you have to complete a T4 slip for each of your employees. Then, you need to fill out a T4 summary with all of your employees’ information. If you paid a pension to any previous employees or made payments to subcontractors, you should fill out a T4A for them as well.
You have to complete these forms for any employee you paid more than $500 or any employee on whose behalf you made payroll deductions. These forms must be given to your employees by the last day of February following the year during which they worked for you.
Online Payroll Calculator
To calculate your employees’ deductions, you need to use a range of different formulas. The CRA publishes tables of formulas designed to be utilized with computer software.
These formulas have multiple variables, vary from province to province, and aren’t something that most people can use to calculate payroll deductions by hand. In contrast, EI premiums and CPP contributions are relatively easy to calculate:
- Employee EI Premiums: Insurable Earnings x 1.66 percent, up to a maximum of $858.22 per year.
- EI Premiums for Employees in Québec: Insurable Earnings x 1.3 percent, up to $672.10 annually.
- Employer EI Premiums: Employee’s Premiums x 1.4.
- Employee CPP Contributions: Pensionable Earnings minus $3,500 times 4.95 percent, up to $2,593.80 annually.
- Employer CPP Contributions: Employee CPP contribution x 1.
The EI and CPP rates and maximum annual contributions change every year. These rates are the most recent as of August 2018. To get help calculating any payroll deductions, you should check out the CRA’s online payroll deduction calculator. Or, consider investing in payroll software to help you with these numbers.
QuickBooks Payroll Add-On
When you add QuickBooks Payroll to your accounting software, you get the opportunity to easily and quickly calculate payroll. You enter the details from your employees’ TD1 forms. Then, when it’s time to pay your employees, you put in their earnings for the pay period.
At this point, the software does the rest. It calculates how much income tax you should withhold as well as your employees’ EI premiums and CPP contributions, and it can remit these amounts to the CRA for you. Because the software is cloud based, it is automatically updated when the rates or the maximum annual contributions change, and by extension, you don’t have to worry about using outdated numbers or payroll formulas.
You can also create custom payroll options. If you pay some employees a monthly salary and others weekly wages, the QuickBooks Payroll Add-On can handle these differences. If you like, you can set up the system so it automatically deposits your employees’ paycheques into their bank accounts and sends them their pay stubs online.
Ready to get started? Adding payroll to QuickBooks Online is as easy as clicking a button.