Hiring your first employee is an exciting milestone, but it also comes with new responsibilities—including setting up payroll deductions. Ensuring you deduct and remit the correct amounts for income tax, Canada Pension Plan (CPP), and Employment Insurance (EI) is essential to stay compliant with the Canada Revenue Agency (CRA). This guide walks you through the steps to set up payroll deductions correctly.
Register for a Payroll Account
Before you can start deducting payroll taxes, you need to register for a payroll account with the CRA.
- Apply for a Business Number (BN): If you haven’t already, register for a BN through the CRA’s Business Registration Online portal.
- Open a Payroll Program Account: This is required to remit payroll deductions and file employee-related tax forms.
Gather Employee Information
To calculate payroll deductions accurately, collect the following from your employee:
- Social Insurance Number (SIN)
- TD1 Personal Tax Credits Form (Federal and Provincial): This form helps determine the amount of tax to deduct from wages.
- Banking Information: If paying by direct deposit.
- Employment Contract: Review the terms of employment, including hours, overtime, and benefits, to ensure compliance with federal or provincial labor standards.
- Start Date and Pay Periods: Clearly establish when the employee starts, how often they’ll be paid, and what the pay cycle will look like.
Calculate Payroll Deductions
As an employer, you are responsible for deducting three main components from an employee’s wages:
- Income Tax: Deduct federal and provincial income tax based on CRA tax tables or payroll software.
- Canada Pension Plan (CPP): Both the employer and employee contribute. The rates and yearly maximum contribution amounts are set by the CRA.
- Employment Insurance (EI): Employees pay a percentage of their earnings, and employers contribute 1.4 times the employee’s contribution.
To simplify calculations, consider:
- CRA’s Payroll Deductions Online Calculator: A useful tool to ensure accurate calculations.
- Payroll Software: Many platforms integrate with CRA tax tables and automatically apply the correct rates.
- Tracking Overtime and Bonuses: Ensure that additional earnings are accurately reflected in tax and benefit deductions.
Remit Payroll Deductions to the CRA
You must send the deducted amounts, along with your employer contributions, to the CRA by the due date. The frequency of remittance depends on your payroll size and history:
- New Employers: Typically remit monthly.
- Larger Employers: May have to remit more frequently.
Key Points:
- Be aware of remittance thresholds. For instance, if your total annual payroll deductions are below a certain amount, you may qualify for quarterly remittance.
- Ensure timely submission. Late payments can result in penalties and interest.
- Keep proof of remittance in case of CRA inquiries.
Issue Pay Stubs and Maintain Records
- Provide Pay Stubs: Employees should receive clear breakdowns of their earnings, deductions, and net pay.
- Keep Payroll Records: Maintain detailed payroll records, including hours worked, wages paid, deductions, and remittance details for at least six years in case of a CRA audit.
- Update Records for Changes: If an employee’s tax credits or deductions change, update their TD1 form and adjust future payroll deductions accordingly.
File T4 Slips Annually
At the end of the year, you must file T4 slips for all employees and submit them to the CRA. These documents summarize each employee’s earnings and deductions.
- Review for Accuracy: Ensure all amounts match your payroll records.
- Distribute on Time: Provide employees with their T4 slips by the last day of February following the tax year.
Final Thoughts
Setting up payroll deductions correctly from the start ensures compliance with CRA regulations and avoids costly penalties. Using payroll software or consulting a professional can make the process easier, allowing you to focus on growing your business while meeting your obligations as an employer.