Like every other developed country and government, Canada ensures that taxes are levied to run government programs and expenses smoothly. One such tax is payroll deductions.
With payroll deductions, an employer withholds a certain percentage of money from an employee’s payroll check for various purposes.
Employers are not mandated by law to bear full expenses of their employees’ insurance premiums, so the employees must also pay a portion. This is usually done through payroll deductions.
Payroll deductions are the amounts deducted from an employee’s payroll check, and the employer withholds this deducted amount for remittance.
What is a Payroll Deduction?
The payroll deductions include Income tax, employee contributions to employment insurance (EI), and employee contributions to the Canada Pension Plan (CPP). Invariably, the deduction implies that the amount on the employee’s payroll check will be less than the total earned by him or her.
The employer, by law, must withhold and equally remit the deducted amount directly to the Canada Revenue Agency (CRA). The employee is given credit for the payment of these payroll deductions.
Employer Payroll Deductions
Irrespective of the number of hours that an employee has worked, the payroll deductions must be withheld from the employee’s payroll check.
If, for some reason, however, no deductions are made or withheld by the employer, the liability and responsibility will fall on the employer for any mandated amount that is meant to be withheld and remitted from the employee’s paycheck.
This is why it is always the employer’s responsibility to ensure that all payroll deductions are withheld and remitted promptly.
Employers are to report the payroll by calculating Gross monthly wage earnings and various payroll deductions to arrive at a Net pay. Hence, employers must be detailed and ensure extreme accuracy when calculating the various payroll deductions.
Statutory Payroll Tax Deductions
Canadian law stipulates that payroll deductions must be withheld from an employee’s payroll check. After that, employers must transmit the withheld tax to various tax agencies. The statutory (government) tax deductions include the following:
- Federal Income Tax withholding
- Social Security Tax withholding
- Medicare Tax withholding
- State Income Tax withholding
- Various Local Tax withholding
Voluntary Payroll Tax Deductions
The Voluntary Payroll Tax Deductions are the tax withheld from an employee’s payroll check only if the employee and the employer enter an agreement for such deductions.
Voluntary deductions are contributions made by the employees towards the various benefits in which the employee has chosen to be involved. Voluntary Payroll Deductions include the following:
- Health Insurance Premiums (Medical, Dental, and Eye-care).
- Life Insurance Premiums
- Retirement Plan Contributions
- Employee Stock Purchase Plans.
- Meals, uniforms, Union dues, and other expenses incurred in the job.
Employer Payroll Taxes and Responsibilities
It is also the responsibility of an employer to equally contribute part or a portion of the payroll deductions in addition to the ones contributed by the employees. These are added expenses over the employee’s gross pay. They include:
- State security tax
- Medicare taxes
- Federal unemployment tax (FUTA)
- State unemployment tax (SUTA)
Meanwhile, in addition to issuing paychecks to employees of the company, the employer is, among other things, held responsible for the following:
- The payment of the employer’s share of payroll taxes.
- The deposit and payment of tax dollars were withheld from the employee’s paycheck on time.
- The preparation of reconciliation reports.
- Giving proper financial account and report of the payroll expenses.
- Filing payroll tax returns.
Calculating Payroll Tax Deductions in Canada
The Canadian Revenue Agency (CRA) requires employers and employees to make deductions from their businesses and payroll check, respectively. These deductions are:
- Canada Pension Plan (CPP).
- Employment Insurance (EI).
- Federal and Provincial Income Tax.
Canada Pension Plan (CPP)
For the year 2020, the total maximum pensionable earnings for an employee are $58,700, while the basic exemption for the same year is $3,500. The rate for employee contribution has been pegged at 5.25%.
According to the Canadian government, this increase in contribution rate is due to the Canada Pension Plan enhancement.
Thus, the maximum amount an employee can contribute for the year is $2,898, while the employer’s contribution is the amount equal to the total contributions deducted from the employee.
Employee’s Canada Pension Plan basic exemption for various pay periods
| Pay period | Basic exemption ($) |
| Annually (1) | 3,500 |
| Semi-Annually (2) | 1,750 |
| Quarterly (4) | 875 |
| Monthly (12) | 291.66 |
| Semi-Monthly (24) | 145.83 |
| Bi-weekly (26) | 134.61 |
| Bi-weekly (27) | 129.62 |
| Weekly (52) | 67.30 |
| Weekly (53) | 66.03 |
| 22 pay periods | 159.09 |
| 13 pay periods | 269.23 |
| 10 pay periods | 350 |
| Daily (240) | 14.58 |
| Hourly (2000) | 1.75 |
Formula To Calculate Canada Pension Plan Deductions
The formula below is for calculating the Canada Pension Plan (CPP) contributions for employees receiving salary or wages:
C = the lesser of;
- $2,898.00 – D
- 0525 (5.25%) X [PI-($3500/P)]:
Where:
C= Canada pension plan contributions for the pay period
D= The employee’s year to date
PI= Pensionable income for the pay period, including bonuses and pay increases
P= Number of pay periods in the year
Employment Insurance (EI)
For the year 2020, the Canadian government has pegged the maximum annual insurable earnings at $54,200 and the Employment Insurance (EI) rate at 1.58%, while the maximum annual premium is $856.36.
For instance, if an employee makes $40,000 of insurable earnings, the maximum premium will be calculated as $40,000 X 1.58% = $632.00
Formula To Calculate EI Premiums
The formula below will aid you in determining the calculations in your payroll as an employee and the premium payable by an insured person under the Employment Insurance Act.
EI= The lesser of;
- $856.36 – D1
- 0158 (1.58%) X IE
Where:
EI= Employment insurance premiums for the pay period.
D1= Employee’s year-to-date details and employee insurance premium with current employer.
IE= Insurance earnings for the pay period, including insurable taxable benefits, bonuses, and pay increases.
