A Business Guide on Payroll Taxes & Deductions

When you bring on employees to help you grow your business, you will need to pay taxes and make remittances. Let’s take a look at what your role is as an employer and what obligations it may entail.

Employer Payroll Responsibilities

As an employer, you will have several responsibilities in regards to payroll taxes and deductions which will require a payroll program account to be opened. A payroll program account is an account number assigned to employers, trustees, and payers of amounts related to employment, which is used for identification with the Canada Revenue Agency. Registration for the payroll program account must occur prior to the first remittance date.

When hiring for your business, it is important to consider whether you will be bringing on salaried employees with a fixed annual income or workers who are compensated based on an hourly rate. When administering payroll, the employer is responsible for deducting CPP contributions, EI premiums, and income tax from each paycheque. 

Each year, employers will need to provide a T4 to all the employees they had in the previous calendar year. A T4 or a Statement of Remuneration Paid, outlines…

• Salary
• Tips
• Bonuses
• Commissions
• Vacation pay
• Any extra wages 

Keep in mind that businesses are not responsible for payroll deductions for freelance workers.

What Are Payroll Taxes?

Payroll taxes are the taxes that are paid on the wages of employees – calculated according to a progressive bracket system in Canada. Income taxes are withheld from each paycheque according to the applicable tax rate of that employee’s income bracket. Other deductions include the Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums.

The Canada Pension Plan is a retirement pension that is payable upon retirement (for those who are at least 60 years old). The Employment Insurance program provides temporary income to those who are unemployed or taking time off of work as a result of specific life events such as illness or pregnancy. As an employer, it is very important to make accurate and timely remittances to the Canada Revenue Agency, as the failure to do so can result in significant fines or penalties.

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How Do You Calculate Payroll Taxes?

To calculate the deduction amount for Employment Insurance, you should multiply the salary for that period by the rate provided by the CRA. For 2023, the maximum annual insurable earnings amount is $61,500 and the rate is 1.63%. Both figures are updated by the CRA each year. Employers are also responsible to pay 1.4 times the employee’s contribution amount.

Example: $1,000 Salary x 0.0163 = $16.30 employee contribution

                  $16.30 x 1.4 = $22.82 employer contribution

                  $16.30 + $22.82 = $39.12 total contribution

For employees that are aged 18 to 70, the employer must deduct CPP contributions from their wages. For 2023, the CPP contribution rate is 5.95% and the maximum annual pensionable earnings amount is $64,900. Similar to EI, both figures are updated by the CRA every year. Employers are responsible for matching their employee’s contributions.

Example: $1,000 Salary x 0.0595 = $59.50 employee contribution

                  $59.50 x 1 = $59.50 employer contribution

                  $59.50 + $59.50 = $119 total contribution

Federal and provincial income taxes also need to be deducted from employee wages. The federal tax rates for 2023 are as follows:

Each province publishes its own tax rates as part of the CRA’s Payroll Deductions Tables.

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When and How Must a Business Remit Payroll Deductions?

The deadline for businesses to remit payroll deductions to the Receiver General (CRA) varies depending on the amount of the remittances. The Average Monthly Withholding Amount (AMWA) is the average amount of deductions from two calendar years ago. The due dates for each AMWA level are as follows:

• For new small businesses with an AMWA of less than $1,000, the due date is on or before the 15^th day following the end of each calendar quarter (April 15, July 15, October 15, January 15)

• If your business has an AMWA of less than $3,000, then remittances are due on or before the 15^th day following the end of each calendar quarter.

• If the AMWA is less than $25,000, then remittances are due on or before the 15^th day of the next calendar month after employees are paid

• If the AMWA is from $25,000 to $99,999.99, then the due date for remittances will either be on the 25^th day of the same month as when employees are paid and the 10^th day of the next month

• If your business’ AMWA is $100,000 or higher, the due dates for remittances are: the third working day after the 7^th, third working day after the 14^th, third working day after the 21^st, third working day after the last day of the month

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What Happens If You Do Not Make the Appropriate Payroll Deductions?

Employers who fail to remit the accurate amount of payroll deductions to the CRA or fail to do so in a timely manner can face stiff penalties – the minimum penalty that the CRA charges is 10%. If the failure to withhold the appropriate payroll deductions were deemed to be a willing or grossly negligent act, or if it is a repeat offence, then the assessed penalty can be as high as 20%.

Bottom Line

Calculating and keeping up with payroll deductions may seem like stressful tasks, but they are essential to ensure that your business remains compliant with the CRA. Currently, there are a number of tools and software that can help with calculating deductions for employees. Using one of these applications or consulting a tax professional can help you focus your time and energy on what matters most – growing your business.