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What Are Payroll Taxes? Understanding Canadian Payroll Taxes to Leave Toxic Habits Behind

Paying employees their wages on payday involves much more than depositing a sum of money into a bank account or handing out a pay cheque at the end of the month. Payroll responsibilities also require employers to withhold certain taxes from the money they pay their employees and remit them to the Canada Revenue Agency (CRA). 

But this can get quite complicated. The differences between federal and provincial remittances and employer and employee obligations regarding payroll taxes can be confusing sometimes. The first step to understanding payroll taxes is understanding what exactly the CRA expects of small business owners. 

What Are Payroll Taxes?

Payroll taxes refer to amounts of pay withheld from employee paycheques during the payroll process, along with an employer’s contributions, to pay for essential public services. Payroll taxes fall into four categories: 

  1. Canadian Pension Plan (CPP) contributions, 
  2. Employment Insurance (EI) premiums
  3. Provincial income tax deductions
  4. Federal income tax deductions

Do Both Employers and Employees Pay Payroll Taxes?

Yes, both employers and employees pay payroll taxes. Though employers only contribute towards 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.

Registering with the CRA for Payroll Taxes:

When performing payroll accounting, you’ll need to register your business with the CRA and create a payroll account to make payments directly – all payroll taxes must be remitted to the CRA. Registering a business with the CRA’s “payroll account program” will allow you to make statutory deductions for CPP, EI, and federal and provincial income taxes from employees’ pay and receive refunds on payroll deductions.

Registering for Provincial Taxes

Depending on where your business is located, you may need to register to pay provincial payroll taxes. Provincial payroll taxes are paid by employers alone and are based on their employees’ annual earnings. There are currently five provinces in Canada that impose payroll taxes on employers. Listed below are the provinces that levy payroll taxes on employers as well as the type of payroll tax imposed:

The process to register for a provincial payroll account varies from province to province. For example, a business owner in Ontario must register for an EHT account with the Ontario Ministry of Finance.

With QuickBooks’ payroll tool, tax payments can be automated so that all you need to do is select the payroll tax you want to pay, choose a payment date, and approve the payment. You can also use an online tool like QuickBooks’s Payroll Calculator to automate the payroll calculation.

Understanding Canadian Payroll Deductions

Each payroll tax deduction helps support the diverse services and programs that benefit all Canadians. 

Federal and provincial income tax deductions pay for public services and programs that benefit provinces or the nation as a whole, such as free health care, education, and more. Meanwhile, EI and CPP contributions support individual employees who need access to either retirement or unemployment funding.

For more detailed information on deductions, visit our payroll deductions page.

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How Does an Employer 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 deductions + EI premiums

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 deductions, EI premiums, and federal and provincial income taxes to withhold, the calculation to determine payroll taxes becomes relatively straightforward.

Calculating Payroll Taxes According to 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. 

To calculate provincial payroll tax:

  1. Determine the employee’s total taxable income.
  2. Use the amount from step one to determine the provincial tax rates for that income. 
  3. Multiply the employee’s taxable income by the applicable tax rate(s)
  4. Subtract the employee’s provincial tax credits to determine the amount of tax to be deducted for the year
  5. Divide the result of step 4 by the number of pay periods to determine the amount of provincial payroll tax to deduct for the pay period

To learn more about payroll taxes and how to calculate them, visit the CRA’s website.

What is the Difference Between Payroll Tax and Income Tax?

The difference between income and payroll taxes is who pays and what the taxes fund. Payroll taxes are paid by the employer and are itemized deductions from the employee’s pay cheque. In contrast, income tax is paid by the employee and is based on their salary.  

So while payroll and income tax seem the same, payroll taxes only include a portion of an employee’s income tax.

Payroll Tax: Non-Compliance and Penalties

If you don’t pay your payroll taxes, you could face serious consequences from the CRA. They take non-compliance issues seriously. 

If an employer fails to withhold the required payroll tax contributions or remit them to the CRA, they could become liable to pay for a portion or all of that amount. 

And if non-compliance issues are serious enough, the CRA may take legal action against the employer, seizing their salary or other sources of income, selling property, etc. To ensure compliance, the CRA selects files on which to perform tax audits. This is why it’s important to ensure that you are processing payroll correctly every time.

Performing payroll can be challenging, but it doesn’t have to be. There are many resources and tools to make payroll more manageable and ensure that you are remitting the correct amount to the CRA, including QuickBooks’ payroll resources

While payroll might seem like a complex task, using a payroll tool like QuickBooks can make staying on top of your payroll more manageable. By adding payroll to QuickBooks Online, you can easily file and pay payroll taxes. 

FAQ—Payroll Taxes

Does Canada have employer payroll taxes?

Both employees and employers have payroll taxes. Some payroll tax withholdings, like EI premiums and CPP contributions, are paid by employees and employers. Others, like EHT taxes, are a payroll tax for employers only. 

What is the difference between an income tax and a payroll tax?

Payroll tax withholdings are paid by both employers and employees, though in different proportions for different types, and are taxed based on the employee’s wages. By contrast, income tax is paid solely by the employee and is based on the amount of money an employee earns through various means.

How are payroll taxes calculated in Ontario?

To calculate payroll in Ontario, you must add CPP contributions, EI premiums, federal and provincial income tax deductions, and EHT taxes. CPP contributions, EI premiums, and federal income tax deductions are calculated similarly in every province, as outlined above. 

However, provincial income tax rates vary from province to province. To determine provincial income tax rates for Ontario along with other payroll deduction rates, consult the CRA’s payroll deductions table

How do I calculate payroll taxes per employee?

To calculate payroll taxes per employee, add the CPP contributions, EI premiums, and federal and provincial income tax deductions for each employee. All calculations outlined in this article calculate payroll taxes owed for a single employee. 

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