When it comes to conducting business, payroll is one of the most vital components. Whether you do it for your employees, or you outsource it to a third-party, it is something that has to be done eventually. As for one of the more important parts of payroll? Deductions, and how they affect an employee’s income.
Payroll deductions are usually just one component of your duty as an employer, in the context of remittance. That is why it is crucial to ensure that both you and your workers are informed as much as possible. In order to get the most accurate data and calculations, many businesses opt to use payroll software to streamline these financial processes.
No matter where one conducts their operations, there are certain deductions that must be made in accordance with payroll. Failure to do so will eventually reflect terribly, both on yourself as a company owner, and on your workers. Unwarranted penalties from the CRA are always best avoided.
If you are wondering about the different types of payroll deductions, keep in mind of these following business terms:
1. Federal vs. Provincial Payroll Deductions
For those living in Canada, payroll deduction differs, in the context of federal and provincial tax rates. Across the country, federal tax rates will essentially be the same. However, each province will have a different tax rate, in accordance with that province’s tax laws. Therefore, before deductions are made, you should familiarize yourself with your province’s tax rate laws.
In some instances, this can get relatively tricky. For example, if you have a worker that lives in Ontario, but works for your business stationed elsewhere, you will have to make deductions based on where your business is located. Payroll deduction tables for each website can usually be found on the Canada Revenue Agency’s website.
2. Canada Pension Plan
One of the main types of payroll deductions to be made on an employee’s income is that of the Canada Pension Plan, or CPP. The CPP, in essence, provides financial incentives to those who are primarily retired. Other individuals, such as those who have disabilities, will also be able to be granted these benefits.
Workers between the ages of 18 to 69 will have their employer automatically deduct these CPP contributions from their pay. If you are the employer, and depending on the year, the rate for CPP deductions will vary. It is important to double check what this rate is first if you are unsure, before deduction.
3. Employee Insurance
Along with CPP, Employee Insurance, or EI, is one of the main types of payroll deductions to make if you employ someone. Generally speaking, you will have to deduct EI premiums from your worker’s insurable earnings. For those who operate in Canada, insurable employment includes most employment under a contract of service.
It is important to note that, unlike CPP, there is no age limit for deducting EI premiums. For the most part, a premium payment will be made for every one hundred dollars of insurable earnings, until a pay out of the maximum contribution has been reached. Like CPP, ensure you know beforehand those premium amounts, before deduction.
4. Income Tax
As mentioned previously, federal and provincial taxes have to be made on income. As such, this portion of payroll deduction usually comes after CPP and EI deductions have been made. At the federal level, tax rates largely depend on your employee’s income level. This is because there are certain brackets that will have their own, respective tax rate.
For example, if you have an employee who earns between $1 and $48,535, a fifteen per cent tax rate will be applied to that income. In the context of provincial tax rates, it largely depends on that location’s provincial tax laws. These rates, like most terms regarding deductions, can be found on Canada’s home website.
5. Group RRSP
Most individuals who are employed, in some instances, are familiar with a Registered Retirement Savings Plan, or RRSP. Group RRSP are set up to help workers save money at work by contributing through payroll deductions. Depending on the conditions pertaining to the plan, both the employer and employee may contribute.
In addition, all contributions are tax-deductible, with all investment earnings also being tax-sheltered. For your employee’s benefit, they ultimately decide how that income is invested. Although there may be some restrictions enacted regarding a Group RRSP, it nevertheless remains a great, albeit optional, aspect of payroll deductions.
6. Optional Pension Plans
If you own a business that offers this benefit, you will inevitably have to deduct a portion of it from a worker’s pay, if they opt-in. Alternative pension plans generally come in two formats, Defined Benefit, or DB, and Defined Contribution, or DC. The former pays a worker a certain amount of retirement income for life, using a specific formula.
With DC pension plans, contributions are guaranteed, although retirement income isn’t. If a worker chooses to opt-in, be sure to let them know of just how deductions will be made on their pay, in order to contribute to these secondary pension plans.