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Payroll basics: Payroll deductions & employee benefits taxation
When your business hires individuals and pays them salary, bonuses or commissions and provides employee benefits, you become an employer and assume specific responsibilities.
HR payroll process
When you hire your first employee, you or your human resources (HR) department will need to register for a payroll account. You also need to have all employees complete both the federal and provincial copies of form TD1. These forms should be completed annually before the end of the first pay period. They allow you to set the appropriate tax-deduction rates for employees considering any deductions they are allowed, such as those for small children, study, or the care of a disabled person living with them.
Payroll deductions: CPP, EI and income tax
The employer has an obligation to deduct Canada Pension Plan contributions (CPP), Employment Insurance premiums (EI) and income tax from remuneration paid in each pay period. You will need to remit these deductions along with the employer’s share of CPP (equal to the amount withheld from the employee) and EI (1.4 times the amount withheld). These deductions must be remitted to the Canada Revenue Agency (CRA) on a regular basis.
The CRA will assess a penalty if an employer:
- Fails to deduct the required amounts
- Deducts the amount but does not remit it
- Remits the amount after the due date (interest will be applied from the date the payment was due)
Employers also have the responsibility to report employees’ income and deductions on the appropriate payroll forms, T4 and T4A, which are due by the last day of February. The employer is also obliged to complete and issue an ROE (Record of Employment) within five days of when the employee stops working for the company.
How to calculate payroll deductions
Payroll deductions can be calculated using CRA’s online payroll calculator. Many bookkeeping software programs also have a built-in feature for payroll deductions. These modules calculate the deductions and post the transaction directly to the appropriate payroll expense and liability accounts.
Many employers, as they grow, choose to use an outside payroll provider (such as ADP, Payweb or Ceridian). You will still need to provide the payroll company with the details for each pay period
(such as biweekly salary, hours worked or hourly rate). This can be done online or over the phone. However, many of the functions surrounding payroll deductions can then be left to the payroll company. The payroll provider will calculate and remit the payroll deductions to the CRA and pay the employees on the employer’s behalf. They will also issue all payroll forms such as T4, T4A and ROE.
Most payroll providers charge a one-time set-up fee and then a payroll service fee (usually per employee) for each payroll run.
Workplace Safety and Insurance Board (WSIB)
Your business likely needs to be registered with the WSIB within 10 days of hiring your first employee. Based on your industry and the amount of compensation being paid, the WSIB will assess the applicable rate, and whether you are required to report and remit payments monthly or quarterly.
Employer Health Tax (EHT)
The Employer Health Tax (EHT) is an Ontario-based tax applicable to all businesses operating in Ontario. There is an annual exemption on the first $450,000* in salaries. (This, in effect, means that businesses with annual payroll of less than $450,000 do not need to pay EHT).
Employee benefits and taxation
When considering different types of employee benefits as part of an employee’s compensation package, it is important to consider how these benefits are taxed. Some types of employee benefits are taxable to the employee, which decreases the incentive to offer the benefit as opposed to a slightly higher salary. Other employee benefits are not tax deductible for the business, which increases the cost of the benefit to the company.
The best scenario is an employee benefit that is not taxable to the employee, but is tax deductible for the business, such as a group disability and health care plan. The worst option is a benefit which is taxable to the employee, but not (or only partially) tax deductible to the employer.
Your accountant can provide details on different aspects of payroll deductions and employee benefits taxation. Every year, accounting firm Welch LLP publishes updated information in its annual Tax Facts and Figures guide (see section 3).
*Rate in effect as of January 1, 2014.