Discover payroll obligations to your employees. Learn common deductions you must make, how to calculate them, and when you must remit them to the CRA.
Unless you run a solo small business, chances are that your employees provide the support necessary to make your company successful. While your employees have the responsibility of helping customers, building products, or providing valuable services, you as an employer have the responsibility to keep their payroll on track and on time.
In Canada, employers have numerous obligations when it comes to payroll and payroll deductions, so understanding those responsibilities and ensuring your workers get paid correctly and on time every time proves vital to your small business’ continued success.
Who Is Considered an Employer?
To avoid any confusion, you should first check to see if the Canada Revenue Agency (CRA) considers you an employer, which means they determine that you have an employer-employee relationship with your worker. The CRA considers paying wages, salaries, bonuses, vacation pay, or tips as evidence of this relationship.
Additionally, if you pay taxable benefits to workers, including personal use of a company car or allowances that reimburse personal expenses, the CRA considers those individuals your employees working under a contract of service. As such, your small business has payroll obligations to those employees, and if you have a complex situation, it might make sense to staff a payroll department to help you meet your obligations.
What Are Your Payroll Obligations as an Employer?
When you operate a small business in Canada, you have lots of obligations both to your employees and the CRA. Setting up payroll is the first of these employer responsibilities. This requires you to open and maintain a payroll program account with the Canada Revenue Agency (CRA). Also, you must get the social insurance number (SIN) of each employee and have them complete federal Form TD1, Personal Tax Credits Return. Keep in mind that employers in certain areas must use provincial/territorial Form TD1 instead.
Next, you must calculate employee deductions for Employment Insurance (EI) premiums, Canada Pension Plan (CPP) contributions, and income taxes. Factor these sums based on the wages, salary, taxable benefits, and allowances you use to compensate your employees. Also, if your company operates its own private pension plan or your employees belong to a union, you must deduct contributions and dues.
Since you remit these payments on a schedule, the CRA requires you to hold these amounts in trust for the Receiver General to keep them separate from your small business’ operating funds. Additionally, you have a responsibility to ensure those amounts aren’t part of an estate in bankruptcy, receivership, assignment, or liquidation.
Finally, you report your employees’ income and deductions on a T4 or T4A slip that you give to each worker. On or before the last day of February for the given year, you must file an information return with the CRA that documents the income and deductions of all your employees.
When workers have an interruption in earnings for any reason, the CRA requires you to complete and file a Record of Employment (ROE). Additionally, be aware that certain provinces and territories have their own requirements for employers, so you should check with an expert to ensure you fulfill the requirements set by your local government.
Aside from the obligation to adhere to Canada’s labour laws, your last responsibility is keeping excellent records, which you should be doing anyway. Excellent payroll records that document each employees’ income and deductions provide evidence you’ve done things right in case the CRA audits your business down the road.
Also, careful records help you avoid penalties for late filing and maximize your deductions at tax time, giving you more money to invest in your business. Full-service small business accounting apps such as QuickBooks Online do the heavy lifting for you by allowing access to all your business’ financials from anywhere with an internet connection.
How Do You Calculate Payroll Deductions?
The CRA makes it simple for you to figure out these deductions with its Payroll Deductions Online Calculator (PDOC). Likewise, the Automobile Benefits Calculator makes short work of totalling how much you must deduct from workers who enjoy personal use of company cars. If you want to streamline this process, QuickBooks provides automatic deduction calculations, custom pay options, free direct deposit, and tax-related documentation, including employee T4 forms.
How Do You Setup a Payroll Program Account?
A payroll program account identifies your small business to the CRA and allows you to remit deductions for your employees. If you don’t already have a business number, the CRA provides you with one when you set up your payroll program account.
When you get one, it includes your nine-digit business number, the two letter code for the program type, and a four-digit reference number for each sub-account in your payroll program account. Keep in mind that you must set up this account before your small business’ first remittance due date, or the 15th day of the month following when you first started making employee deductions.
To complete your setup, you need the following:
- The date you paid employees their first wages
- The months covered for payroll of employees’ wages
- The pay period type (weekly, quarterly, etc.)
- The number of employees
- The name of the payroll service you use
- The country of your parent company or affiliate (for foreign-owned corporations)
- The name of your franchisor and country of franchise’s head office (if any)
What Payroll Information Do You Collect From Employees?
When your small business hires new employees, you must collect certain information for payroll purposes. These include your employees’ social insurance numbers (SIN) and a completed Form TD1, Personal Tax Credits Return.
Your new worker needs to complete this form when you hire them, and they must provide you with a new completed form within seven days of events that may change their yearly personal tax credits. For instance, if your employee has a new baby, they must complete a new Form TD1 to reflect this change.
Keep in mind that employees who don’t fill out new forms may incur a $25 per-day penalty for late forms, with a minimum penalty of $100 and a maximum of $2,500. If no changes occur, your employees don’t have to fill out new forms on a set schedule.
What Are CPP Deductions and How Do You Calculate Them?
The CRA requires employers to match employee contributions to their Canada Pension Plan retirement accounts. Keep in mind that if you operate in Quebec, you make those payments to the Quebec Pension Plan (QPP).
These deductions apply to employees between 18 and 69 years old who have pensionable employment with you during the year and who aren’t considered disabled under the CPP or QPP. Workers at least 65 but under 70 years old can stop these deductions by completing parts A, B, and C of Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election, and giving it to you for filing with the CRA.
For 2019, both employers and employees have a 5.10% contribution rate that tops out at $2,748.90 for each of you. This applies to maximum pensionable earnings of $57,400, and the first $3,500 is exempt from deductions. This means that you make contributions on earnings up to a maximum of $53,900 per employee.
If you operate your small business in Quebec, you and your employees contribute 5.55% each to the QPP, and earnings $3,500 and below remain exempt. The CRA provides two handy ways to calculate CPP contributions, or you can use an accounting app such as QuickBooks to automate the process.
What Are EI Deductions and How Do You Calculate Them?
EI, or employment insurance, offers workers temporary financial assistance while they’re unemployed, looking for work, or acquiring new skills. They can also get EI assistance when they’re sick, pregnant, caring for seriously ill family members, or caring for a newborn or adopted child.
As a Canadian employer, you must deduct a portion of your employees’ EI premium from their paycheques while you contribute 1.4 times their payment for the premium. Keep in mind that you deduct these premiums no matter the age of the worker. Also, in Quebec, you must also pay premiums to the Quebec Parental Insurance Plan (QPIP), but you receive discounted EI premiums.
As of 2019, EI premiums run 1.62% up to maximum annual insurable earnings of $53,100. Of this, employees contribute a maximum of $860.22, while employers pay a maximum of $1,204.31. The CRA offers the EI Premium Reduction Program, which lowers your premiums in exchange for your purchase of approved short-term disability plans for your workers.
What Is Taxable Income and Benefits?
The CRA considers taxable income and benefits payments you make to your employees in exchange for work. Taxable income includes wages, salaries, tips, vacation pay, and bonuses, while benefits include things such as allowances for personal spending and personal use of cars belonging to the business.
For taxable benefits, you must use the CRA’s rules to determine their fair market value and note it accordingly on your employees’ T4 forms. Also, remember that you must deduct a portion of the value of taxable benefits when you calculate your employees’ CPP and EI contributions as well.
What Are Some General Employer Payroll Obligations?
Aside from normal payroll deductions, employers have other responsibilities to their workers, and these can vary depending on the province or territory. In general, though, Canadian employers must pay workers 1.5 their regular wage rate if they work over eight hours in a day or 40 hours in a week.
Also, employees with the company for more than 30 days get their average daily pay on federal holidays, though if employers and employees agree to it, employees can opt for time-in-lieu of payment that gives them paid time off (PTO) equal to 1.5 hours for every hour they worked overtime. Additionally, employers give employees 4% of their annual earnings in vacation time.
Your employees help your business thrive, so you owe it to them to keep their payroll running smoothly. This means paying careful attention to details, which protects both of you and keeps the CRA happy with your small business. Though these payroll costs might seem daunting, the CRA lets you deduct most of your employee spending so you end up paying less in taxes annually. Did you know you can pay employees in Quickbooks? Add Payroll today.