Paying your employees accurately and on time is about more than being a good employer: it is the law. Because your payroll expense is probably the largest expense you have, keeping track of it is very important.
Below we’ll review how to calculate payroll, including gross wages, payroll taxes, and benefits. This will give you the tools you need to manage this large expense accurately and efficiently.
What is Payroll?
Payroll is a catch-all term encompassing two distinct aspects of your financial responsibilities as an employer.
The first is the sum total of all expenditures paid to your employees. For most employers, it can be broken down into three categories:
- Remuneration: This is the agreed-upon wage between employer and employee.
- Benefits: This will be the portion of any benefits paid by the employer.
- CPP and Employment Insurance: This deals with an employee’s Employment Insurance and Canadian Pension Plan contributions.
The second element that goes into payroll is deducting the proper amount of an employee’s wages to satisfy his or her annual income tax. This is known from a small business owner’s perspective as an employee’s income tax deduction.
Let’s take a look at expenditures first.
Expenditures, which are your standard expenses as stated above, can be broken down into several categories. Ultimately these little pieces add up to the gross pay your employee or employees receive. Still, it’s easier to understand expenditures if you break it into these four separate categories.
Remuneration, also known as compensation, is how your employees are paid. It varies based on employers, business types, and fee structures. Generally, the common wage structures are annual salary or hourly employees. There is also the chance of a base salary, plus commission, particularly in sales.
Bonuses — whether given annually as part of a hiring package or just for recognition of work — should also be considered part of an employee’s remuneration.
Basically, think of their remuneration as their total take-home pay: hourly rate or salary, commission, bonuses, and any other financial boons they receive.
Remuneration is the basis on which your employees — and by extension, your business — will be taxed, so being accurate and extra attentive to detail here is the key to properly withholding taxes from employee checks. It’s key to filing taxes as well.
2. Benefits paid by the employer
As an employer, you can choose to offer your employees benefits. Many employers also pay a portion of these expenses on behalf of the employee as part of their benefits package. You can also offer the option to deduct the cost of the benefits from the employee’s gross wages.
Typical benefits include:
- Healthcare, dental, and vision insurance
- Life insurance
Typical benefits with voluntary deductions include:
- Retirement contributions (matching the percentage for a RRSP)
- Child daycare
- Flexible spending accounts
- Healthcare spending accounts
The above benefits generally require the employee to contribute a certain percentage from his or her pre-tax income to pay for expenses throughout the year.
These deductions do not normally require a contribution from an employer (with the exception of retirement accounts), but they do require that an employer keeps track of these deductions and calculates them correctly.
Additionally, if you offer your employees paid vacation or sick days, you’ll need to have a way of factoring in these days as well. Most paid time off is paid at the same rate as a day of work, so the most important thing is to make sure you’re keeping track of the number of hours an employee is taking as paid time off to ensure that he or she isn’t abusing your policy.
3. Canadian Pension Plan (CPP) and Employment Insurance (EI)
This category encompasses federal, provincial, and local taxes (if applicable) that both an employer and his or her employees are required to pay. All employees and employers are responsible for making Social Security and Medicare contributions. Employers are solely responsible for paying federal unemployment tax payments.
For tax year 2020, the federal tax rates are as follows:
- CPP: 5.25% of gross wages with an earning limit of $58,700.
- EI: 1.58% of gross wages with an earning limit of $54,200.
Your employees’ wages determine the final amount you, as a business, will pay. Start by deducting the applicable percentages — 5.25% for CPP and 1.58% for EI — from the employee’s gross wages. Do this for every employee you have.
After you have a sum total of your employees’ contributions, you must match that contribution. Once all payments are pooled, the business is responsible for making this total payment on behalf of the company and its employees.
Income Tax Deductions
As an employer, your responsibility is to correctly calculate the amount of gross wages that are eligible for federal and provincial taxes, as well as the subsequent tax amount. Once you’ve deducted that amount, it’s your responsibility to pass that money along to the appropriate government agency.
As an employer, you need to be aware of your province’s tax rate so you can correctly deduct it from your employees’ gross wages.
First you must fill out Form TD1, there are two types of this form – one for federal and provincial income tax. Once these forms are completed, they can be used to determine that amount to deduct from the income an individual receives in a year.
Learn more about deductions and remittances here.
How to Calculate Payroll
Unless you’re an accounting wizard, you’ll probably need help calculating your payroll, paying your employees, and keeping all of your required tax payments straight. There are a few ways to go about this:
Calculate it on your own
Hire an accountant or payroll specialist
Automate the payroll process using a full-service payroll software or online payroll solution, such as QuickBooks Payroll. Most payroll services offer a trimmed-down solution for small business owners who may not need as many features as larger companies.
There are also free online tools, such as QuickBooks’s Payroll Calculator, which can calculate an employee’s pay cheque with just a few pieces of information. If you only have one or two employees, this solution might be all you need.
Perfecting Payroll Every Payday
As illustrated, payroll is not a simple one-time calculation and has many intricacies that can be hard to keep straight for small business owners who are juggling many other responsibilities. If you choose to manage your payroll yourself, make sure to diligently track these different charges and find an easy solution that works for you.
Otherwise, don’t be afraid to ask for help so that you can keep your most important asset — your employees — compensated and happy.