If you employ Canadian workers, you have to know how to pay them legally and properly in order to stay compliant with tax legislature. This includes knowing how to make payroll deductions. By law, there are three payroll deductions that every business needs to make. There are also non-compulsory deductions that businesses may withhold depending on the situation.
The basics of Canadian payroll deductions are standard. Here are the three mandatory deductions you need to know about before you cut your employees’ first pay cheques.
1. Income Tax
Every business employing Canadian workers needs to deduct both federal and provincial taxes. The rate that will need to be deducted can range from fifteen to fifty percent. In Canada, the rates are graduated based on the employee’s income bracket—the higher the income, the more tax will be deducted. The exact amount will depend on other factors as well, such as your province of operation, employee classification, and the TD1 form your workers fill out upon onboarding.
2. Employment Insurance
Your business will also need to make deductions for Employment Insurance (EI). Under this mandatory federal program, workers pay into the plan in order to receive financial help if they are laid off, need to take a leave of absence, or need to take time off for similar, eligible situations. The amount deducted from employee pay cheques has an annual maximum. Once it’s been achieved, the business must stop deducting. There are also some exceptions to consider, such as when hiring members of your family or making special payments.
3. Canadian Pension Plan
Another mandatory federal program, the Canadian Pension Plan financially assists workers once they retire after the age of 60 in every province except for Quebec. Employees between the ages of 18 and 70 who are physically abled and are in pensionable employment will need to contribute to this plan if they’re not already receiving these benefits. Maximums and exceptions also exist for this deduction, so ensure that you have all your facts before you start making these mandatory withholdings.
Income tax, CPP, and EI are mandatory taxes that every employer needs to make. However, other non-compulsory deductions can be withheld from pay cheques. If your employees are part of a union, union dues will need to be withheld. If you provide your workers with group insurance premiums, a certain amount can be taken out of their pay for that as well. The same goes for companies with pooled RRSP programs. In some cases, governments can order that employers deduct child support and other payments as well. Though many of these deductions are common in business, they are not necessarily made by every employer for every employee.
Don’t Risk Non-Compliance
In order to stay compliant with tax legislature, your company must understand payroll deductions and properly deduct the required amounts during each pay period. Online charts and payroll calculators can help you with this task. However, you’re also required to keep up with changing rates and laws and then remit the proper amounts to the government. Making payroll deductions, a more complex thing than originally thoughts as they can vary based on several factors.
If payroll deductions are calculated improperly, your company could be facing fines and penalties. If you don’t want to take the chance of errors occurring, consider outsourcing your payroll needs to an outside provider. You’ll have more time to dedicate to your firm’s sales and services, while also ensuring that your due diligence has been done so you stay on the government’s good side.