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What is a Payroll Expense?

Your employees are one of your business’s greatest assets: they play a crucial role in ensuring your day-to-day operations run smoothly and are often the backbone of your business.

But employees account for one of the most common small business expenses: payroll expenses (also known as payroll costs). 

Keeping track of expenses is one of the main pillars of doing business. After all, expenses can affect your bottom line just like profits, so payroll expenses are no exception. It’s essential to have an in-depth understanding of your payroll expenses so you can accurately measure your company’s cash outflow and ensure your end-of-year checklist adds up.

Payroll Expenses: The Definition

Simply put, payroll expenses in Canada are the total wages given to an employee, including the portions of the employee’s salary deducted as payments toward taxes and benefits. These deductions turn one’s gross income (pay before deductions) into net income (salary post deductions). 

As a business owner, you are responsible for these deductions, whether for health or housing benefits or CRA remittances. Later on, we’ll look at these deductions and explain how you can calculate them.

Breaking Down Employer Payroll Costs

Let’s break down payroll expenses even further. 

We know that employer payroll costs represent the total sum of money an employer pays their employees to compensate for labour. However, this still begs the question, what makes up this total sum of funds? Payroll costs can be broken down into smaller segments, such as employee benefits, tax deductions, CPP/QPP contributions, and EI premiums. Some of these expenses are mandatory, and some are voluntary, so as the business owner, you get to decide which voluntary costs you incur. 

Employee benefits

In today’s labour market, it’s common for Canadian business owners to participate in employee benefits. These could be RRSP and TFSA contributions, where the employer adds a portion to the employee’s contribution. These are usually tax-free benefits and fall into the category of voluntary expenses. Other voluntary employee benefits could be company stocks that an employee can buy at a subsidized rate.

Tax deductions

While federal taxes are the same across Canada, provincial and territorial taxes vary. So if an employee lives in Saskatchewan but works for you in Ontario, they’ll be subject to Ontario’s tax rules. If you’re curious, you can look at how regions like the Yukon and Saskatchewan deduct taxes. But it’s important to note that Quebec’s taxes differ from the rest of the country.

CPP contributions

Every Canadian over 18 until 70 must pay towards the Canadian Pension Plan, a taxable benefit that replaces a portion of your income after retirement. While the employee pays half the contribution, you, the employer, are to pay the other half. Quebec has an entirely different plan, known as the QPP or Quebec Pension Plan.

EI contributions

Employment Insurance is a program that allows Canadians to temporarily earn income if they lose their job to help them focus on finding new employment rather than worry about finances.

Understanding Payroll Contributions

As a small business owner, you may have wondered how employer payroll contributions work and the regulations surrounding them. The Canadian Pension Plan and Employment Insurance program have their own rates that employers must contribute. To make things easy, we will break down the regulations for each. 

For Employment Insurance contributions, an employer must match 1.4 times the amount deducted from the employee’s wage. For example, if the amount deducted from the employee’s salary is $16.30, then the employer must contribute $22.82. The amount of money deducted from the employee’s wage is calculated at $1.63 for every $100 earned – with a maximum insurable earning of $61,500 in 2023. The employer and employee must only contribute up to that maximum amount for the year. 

All working Canadians must contribute to their Canadian Pension Plan if they are between 18 and 70 years old. Both employers and employees contribute the same amount to the CPP, which is 5.59% of the employee’s wage as of 2023. Additionally, just like the EI, CPP has a maximum amount – the contribution limit for CPP in 2023 is $66,600. 

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How to Calculate Payroll Expenses

All this information is excellent, but how do you calculate payroll expenses for your employees? Making these calculations can seem challenging at first, between the several steps and all the data you’ll have to gather. Here’s a step-by-step process that lays out everything you’ll need to get an accurate calculation: 

Collect information on TD1 Form

You can do this by asking employees to fill out their TD1 form, including their personal information and their SIN number. Doing so is the first step to registering them for payroll. 

Use payroll cycle to determine gross pay

Calculate the pre-deductible earnings of your employees for the year.

Calculate remittances to calculate net pay

Calculate each employee’s required deductions (taxes and taxable benefits) and subtract them from their gross pay to determine the net income. You can use this payroll calculator to fast-track things.

Submit payroll tax deposits

Next, you must pay remittances to the CRA electronically or via cheque. Be sure the CRA receives these on or before the 15th of the month after you’ve made the deductions. 

Complete payroll tax forms

Finally, you must fill out a T4 slip for each employee annually. You’ll have to file the T4 information return and distribute the slips to your team. You can also do this electronically if you prefer.

What If You Don’t Make Payroll Deductions?

Everyone makes mistakes, and mistakes can occur when it comes to making payroll remittances. While you’re constantly trying to stay on top to ensure your business is running the way it should, it’s not uncommon to make an error in the many processes. When it comes to payroll deductions, if ever one fails to make the necessary contributions to the CRA, they’d be subjected to a 10% penalty for the amount owed. And if this occurs more than once in the same calendar year, the penalty painstakingly rises to 20% if the failure occurs due to negligence or voluntary reasons.

Unfortunately, the worst-case scenario could include the government taking a more hands-on approach, which could involve the government requesting parts of your income or claiming your property. They could also take necessary legal actions if required. 

How Can You Manage Payroll?

While the human brain is a wonder and can do amazing things, it is human. As a business owner, you can avoid manual errors by setting up payroll tools that automate most calculations to reduce the energy wasted on cumbersome tasks and save hours. With these in mind, one may wonder if a manual process is still the best way to approach payroll.

While you handle your business, we’ll make it ours to take care of the math, fill out the forms, calculate tax rates and even help you set up multiple pay schedules. Yes, even for holidays and sick leaves. Learn more about QuickBooks Payroll.

Payroll Expenses FAQs

What is the difference between a payroll expense and liability?

As a business owner, payroll expenses are the costs involved in running a business. Payroll liabilities are costs you, as an employer, would pay for hiring workers.

What are the payroll costs?

Payments you make to an employee for their services rendered to a business include taxes and benefits.

What are examples of payroll expenses?

Paid holidays, meals, uniforms, housing etc., can be considered as payroll your potential payroll expenses.

What expense category is payroll?

As the most common type of payroll, it falls into the wages and salaries category and includes overtime, bonuses and commissions.

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