Source deductions refer to the money you withhold from your employees’ paycheques and remit to the Canada Revenue Agency (CRA). These deductions include Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums and income tax. The amount you must remit varies based on how much your employees earn, as well as any deductions for the dependents of your employees.
Who Pays Source Deductions?
Employers pay source deductions to the CRA. As a business owner, you take the amount out of a worker’s cheque. Sources of income for employees include salary, wages, commissions, taxable benefits, and pension income. If you manage a pension plan for your employees, you also remit source deductions from your portion of the payment.
How Do You Pay Source Deductions?
When you hire your first employee, you must set up a payroll account with the CRA. Through your payroll account, you can access the forms you need to calculate payroll deduction amounts and make remittances. If you hire consultants or freelancers, you do not have to make source deductions on their behalf. These individuals are considered self-employed and must take care of their own CPP, EI, and income tax payments.
How Do You Calculate Pay Source Deductions?
CRA has an online calculator to help you determine how much money to withhold from an employee’s wages or salary. The amounts change based on how much money a person makes. For example, employees who make less than $46,605 per year in Ontario pay a tax rate of 15%, and people who make between $46,606 and $93,208 pay 20.5%. Rates of withholding may change from province to province and even with certain municipalities.
Another way to help you manage payroll and withholdings comes from QuickBooks Online and its pay schedule manager. You and your employees can view pay stubs, pay employees directly and take care of any T4 forms using QuickBooks; knowing how much to deduct for your employees makes tax time easier.
Review Changes to Source Deductions Thresholds
The government of Canada revises income thresholds and limits related to source deductions on an annual basis. To ensure you are withholding the right amount of source deductions from your employees and that you are contributing the correct amount to the CRA, review these changes annually on the CRA’s website. Ideally, you should look at the changes in the fall of each year so that you can budget for payroll expenses in the upcoming year.
For example, as of 2017, the maximum amount of annual insurable earnings increased to $51,300. The previous year, in 2016, you only had to remit Employment Insurance premiums on the first $50,800 of each employee’s salary. However, in 2017, the rate decreased – and as a result, the maximum employer premium per employee also decreased.
QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.