Most small businesses start with a few contract employees, but as they grow they move towards hiring full-time employees and getting them on the payroll. Sifting through all the information on the Canadian Revenue Agency to set up payroll for the first time can seem scary and daunting. This three-part blog series will take you through each step needed to set up payroll, calculate deductions, and maintain your accounts using QuickBooks in a clear and easy-to-follow manner.
Part 2: Information needed for hiring an employee and calculating deductions.
Now that you have your Business Number (BN) and Payroll Account registered with the Canada Revenue Agency (CRA), you can begin hiring and calculating the deductions required for remittance.
Note: Don’t have a BN or Payroll Account? See Part 1: Setting up your Business Number and Payroll Program with the Canada Revenue Agency
Hiring Your First Employee
To get started, you will need the Social Insurance Number of the employee and then you will need to file a TD1 Personal Tax Credits Return. The Personal Tax Credits Form is used to determine the amount of tax to be deducted from an individual’s employment income. Neither the federal or provincial form need to be submitted to the CRA but they must be completed and kept on file. Also, this form does not need to be submitted each year unless there is a change to federal and/or provincial tax credit amounts.
Calculating Personal Tax Credit Amounts using the Tax Deduction Estimator
The CRA has an online calculator that will help your employees estimate the amount of tax to deduct per pay cheque. The more accurate their information is, the fewer corrections there will be at tax time for your employee.
Have your employee estimate the following:
- Annual net income
- Annual pension income
- Annual tuition fees
- Dependants’ ages and net income
- Spouse or common-law partner’s net income
- Amounts your dependant(s) will not use on their income tax and benefits return
- Amounts your spouse or common-law partner will not use on their return
What Provincial or Territorial Tax Tables Should You Use?
As an employer, you must know your employee’s province or territory of employment so you can withhold the proper deductions. This depends on whether your employee physically reports for work at your establishment or “place of business”.
For income tax, Canadian Pension Plan (CPP) and Employment Insurance (EI) withholding purposes, an “establishment of the employer” is any place or premises in Canada that is owned, leased or rented by you. It is usually where one or more employees report to work or where one or more employees are paid.
This does not have to be a permanent physical location. For example, the place of business for a construction company can be one or more construction sites or the place of business for a carnival can include a shopping mall parking lot. In these examples, the employee’s province or territory of employment would be the one in which the field office or shopping mall is located.
Example of Employee that Reports to Your Establishment
If your employee reports to your establishment in person, the employee’s province or territory of employment is the same as that used for your office.
Your head office is in Ontario, but you require your employee to report to your place of business in Manitoba. In this case, use the Manitoba Payroll Deductions Tables.
Your employee lives in Quebec, but you require your employee to report to your place of business in New Brunswick. In this case, use the New Brunswick Payroll Deductions Tables.
Your employee works from a home office in Alberta, but occasionally has to report to your Alberta office. You pay your employee from your head office in Ontario. Use the Alberta Payroll Deductions Tables since the employee sometimes reports to your Alberta office.
If your employee does not have to report to your establishment in person (for example, the employment contract says the employee works from a home office), the employee’s province or territory of employment is the one from where your employee’s salary and wages are paid, usually the location of your payroll department or payroll records.
Your employee does not have to report to any of your places of business, but you pay the employee from your office in Quebec. In this case, use the Quebec Payroll Deductions Tables. The employee does not have to pay CPP contributions, but may have to pay Quebec Pension Plan (QPP) contributions.
In addition, there are special cases for companies that don’t have an establishment in Canada. This information can be found on the CRA website.
Once you have determined the province or territory to use for deducting CCP contributions, EI premiums and income tax, you can use the Payroll Deductions Online Calculator to determine your (employer) share to deduct from each pay period. You will also need the Personal Tax Credits Form your employee completed.
The deductions you collect should be held in trust for the Receiver General in a separate account from your operating business account. To avoid costly penalties, see our next post Part 3: Remitting Deductions, Filing timelines and Keeping Records.