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Payroll

What are payroll taxes? All you need to know


Key Takeaways

  • Payroll taxes are mandatory contributions to fund public services like the Canada Pension Plan (CPP) and Employment Insurance (EI).

  • Employers must deduct, match, and remit payroll taxes to the Canada Revenue Agency (CRA).

  • Using payroll software can help streamline tax calculations and ensure compliance


  • Payroll taxes are a crucial component of running a business in Canada, ensuring contributions to public services like healthcare, pensions, and employment insurance. But for business owners, navigating payroll tax obligations can be complex and time-consuming.

    This guide breaks down what payroll taxes are, how they’re calculated, and what you need to know to stay compliant and keep your business running smoothly.

    What are payroll taxes?

    Payroll taxes are mandatory contributions that fund federal and provincial programs like pensions, employment insurance, and healthcare. They are typically deducted directly from employee wages and supplemented by employer contributions. These taxes ensure that programs such as the Canada Pension Plan (CPP) and Employment Insurance (EI) remain funded, supporting workers and their families during retirement, unemployment, or unexpected life events.

    Understanding payroll taxes is vital for Canadian businesses because it ensures compliance with CRA requirements while contributing to Canada's economic stability.

    Who pays payroll taxes?

    Both employers and employees pay payroll taxes. Though employers only contribute to some of these taxes at different rates than their employees. Employers must match their employees’ CPP contributions and make payments towards EI premiums. By contrast, payroll tax remittances for employees include CPP contributions, EI premiums, and federal and provincial income tax deductions.

    For employees, taxes are deducted from their wages for programs like CPP, EI, and provincial healthcare premiums (if applicable). Employers match certain deductions, such as CPP and EI, and remit these along with the employee portion to the CRA.

    It’s important for business owners to communicate these deductions to employees to maintain transparency and trust.

    Employer responsibilities for payroll taxes

    When performing payroll accounting, you’ll need to register your business with the CRA and create a payroll account. Registering a business with the CRA’s payroll account program will allow you to make remittances for CPP, EI, and federal and provincial income taxes from employees’ pay.

    Employers play a critical role in payroll tax administration. Their responsibilities include:

    1. Registering with the CRA: Employers must open a payroll account with the CRA to start remitting deductions.
    2. Calculating deductions: This includes federal, provincial, and sometimes municipal taxes. Employers should use CRA-approved formulas or software.
    3. Remitting deductions: Timely remittance of both employee and employer portions is required to avoid penalties.
    4. Issuing accurate T4 slips: Employees rely on these slips for tax filing, and inaccuracies can lead to compliance issues.
    5. Staying up to date: Tax rates and requirements change frequently, making it essential to monitor updates from the CRA and provincial tax authorities.


    Types of payroll taxes in Canada

    Payroll taxes vary across provinces and may include:

    • CPP: Both employers and employees contribute. Contribution rates are updated annually.
    • EI: Contributions are made by employees and matched by employers at a rate of 1.4 times the employee rate.
    • Provincial payroll taxes: Some provinces impose additional taxes like health premiums or workers' compensation levies. For example:
    • Ontario: Employer Health Tax (EHT)
    • Quebec: Contribution to the Health Services Fund

    Understanding these distinctions is crucial for businesses operating in multiple provinces.

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    “My employees have the QuickBooks Workforce app on their phone. When they get to work they click ‘time in’ and then I can export, approve, and run payroll. It’s so smooth.”

    Tori Yeomans- Owner of Pride Beauty Lounge.

    What is the difference between payroll tax and income tax?

    The difference between income and payroll taxes is who pays the tax and what the taxes fund. Payroll taxes are paid by the employer and the employee. In contrast, income tax is paid by the employee and is based on their annual earnings.

    So while payroll and income tax seem the same, payroll taxes are only a portion of what is deducted from an employee's paycheque. While payroll tax and income tax are often mentioned together, they serve different purposes and are calculated differently.

    Key distinction: Payroll taxes are tied to specific programs, and employers contribute directly to them. Income taxes are broader and are paid entirely by employees (via employer deductions) and businesses on their profits.


    note icon Key distinction: Payroll taxes are tied to specific programs, and employers contribute directly to them.Income taxes are broader and are paid entirely by employees (via employer deductions) and businesses on their profits.


    How to calculate payroll taxes

    Calculating payroll involves variables that are unique to each employee’s income and circumstances.

    That being said, payroll tax withholdings can be calculated using this simple formula:

    payroll tax = federal income tax + provincial income tax + CPP + EI

    To calculate payroll tax withholdings manually, you will need to determine the amount owed for each individual payroll deduction type. Once you have determined the amount of CPP, EI, and federal and provincial income taxes to withhold, the calculation to determine payroll taxes becomes relatively straightforward.

    The steps to calculate payroll taxes are:

    1. Determine gross pay: Calculate the total earnings, including wages, overtime, and bonuses.
    2. Apply CRA formulas: Deduct federal and provincial taxes using the CRA’s payroll deduction tables or other automated tools.
    3. Add employer contributions: Include the employer portion for CPP and EI.
    4. Factor in additional provincial requirements: Include any province-specific payroll taxes or premiums.

    Automating this process with payroll tools can save time and reduce errors.

    Payroll taxes by province

    Provincial tax rates vary from province to province. Because of this, the calculation for provincial or territorial payroll tax is dependent on where your employees live. Some provinces impose additional taxes or premiums that employers must account for.

    Here’s a breakdown of the key differences by region:

    • Ontario: Employers in Ontario must pay the Employer Health Tax (EHT), which is calculated as a percentage of total payroll. Small businesses may qualify for exemptions if their total payroll falls below certain thresholds.
    • Quebec: In addition to federal payroll taxes, employers in Quebec contribute to the Quebec Pension Plan (QPP) instead of the CPP, as well as the Quebec Parental Insurance Plan (QPIP). Employers also contribute to the Health Services Fund (HSF), which is based on total payroll.
    • British Columbia: Employers in British Columbia may be required to pay the Employer Health Tax (EHT), a tax that replaces the discontinued Medical Services Plan (MSP) premiums. This tax applies to businesses whose payroll exceeds the exemption threshold.
    • Manitoba: Employers in Manitoba must pay the Health and Post-Secondary Education Tax Levy, commonly referred to as the payroll tax. The rate is progressive and depends on the size of the employer’s payroll.
    • Other provinces: Alberta, Saskatchewan, and several other provinces do not impose additional provincial payroll taxes. However, employers still need to account for federal payroll taxes, workers’ compensation premiums, and other provincial requirements such as occupational health and safety levies.

    Employers operating in multiple provinces must understand these regional distinctions to ensure compliance. Consulting the provincial tax authority or using payroll tools that automatically calculates region-specific taxes can simplify the process.

    Filing and remittance deadlines

    Employers must remit payroll deductions based on their remitter type — regular, quarterly, or accelerated.

    • Regular remitter: Payments are due by the 15th of the following month.
    • Quarterly remitter: Reserved for small businesses meeting specific criteria, with payments due quarterly.
    • Accelerated remitter: Larger businesses must remit more frequently, often weekly.

    Stay compliant by using CRA’s Payroll Deductions Online Calculator to determine deadlines and amounts.

    Penalties for non-compliance

    Non-compliance with payroll tax obligations may result in penalties, interest charges, and audits.

    1. Penalties: Up to 10% of unpaid amounts. Repeated offenses incur higher fines.
    2. Interest charges: Applied daily to unpaid balances.
    3. Legal consequences: Continued non-compliance may result in audits or legal action.

    Avoid penalties and other negative consequences by maintaining meticulous records and adhering to CRA deadlines.

    Tips for managing payroll taxes efficiently

    Managing payroll taxes can be a complex and time-consuming task, but with the right strategies, you can streamline the process and avoid costly errors. Effective payroll management not only ensures compliance with tax regulations but also builds trust with employees by providing them with accurate and timely pay.

    Whether you're a small business owner or managing a larger team, these practical tips will help you stay organized, minimize stress, and focus more on growing your business.

    • Invest in payroll tools: Streamline calculations, track deadlines, and generate compliant T4 slips.
    • Schedule reminders: Use digital calendars and alerts to track remittance dates.
    • Work with a professional: Consult accountants or bookkeepers for complex payroll issues.
    • Educate yourself: Regularly review CRA updates and tax changes affecting payroll.

    Managing payroll taxes can be overwhelming, but with the right tools, you can simplify the process and stay compliant. QuickBooks Payroll solutions make it easy to calculate, track, and remit payroll taxes — giving you more time to focus on growing your business.

    Frequently asked questions

    Disclaimer

    Money movement services are provided by Intuit Canada Payments Inc.

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    Michelle Cornish
    Michelle Cornish is a freelance writer specializing in demystifying the complexities of accounting and tax for businesses and individuals

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