How to Pay Your Employees

Updated: December 20, 2022

The basics

It’s a big milestone for every business owner when they are ready to hire their first employee.

It means your company is finally gaining traction. And if everything keeps on moving forward, then you’ll most likely want to keep on hiring more employees. But this means that how you run your business will have to change in order to make sure you can pay your employees in the best way possible.

Hiring an employee is the first step to scaling your business. However, before you bring someone on board, there are a number of legal and payroll taxes that you will need to consider. In this post, we will cover the components of employee compensation, including salary, source deductions, and payroll process.

How to do payroll

Payroll is one of the most critical financial processes in every business. Simply giving them a check or wad of cash is not an option since you have a number of employee taxes that you are now subject to.  Below are the administrative and legal steps required for employers to start payroll:

• Open a payroll account with the CRA
• Collect the employee’s SIN number and a completedTD1 form(i.e. tax form for federal and provincial credits)
• Ensure that source deductions are taken when paying payroll
• Remit source deductions to the CRA
• Report the employee’s income and deductions on a T4 slip for tax filing in the following year

What are “Source Deductions” ?

A source deduction is the portion of an employee’s salary that an employer is required to withhold and remit to the CRA. You are required to keep accurate records and make sure that source deductions are tracked.

Source deductions are comprised of three major components, which include: (1) Canada Pension Plan payments, (2) Employment Insurance Premiums, and (3) Income Tax.

Let’s break down these components to understand how they work:

Canada Pension Plan (CPP)

One of the most attractive benefits for employers is being able to contribute to the CPP. The Canada Pension Plan allows eligible employees in Canada receive a retirement pension at the age of retirement based on (i) how much they’ve contributed and (ii) how long they’ve been an employee.

CPP deductions are mandated by the CRA and are comprised of both an employee and employer contribution. The maximum employee and employer contribution for 2021 is $3,166.45. As an employer, your duty is to remit both the employee and employer portion to the CRA.

Employment Insurance (EI)

Employment insurance is paid to salaried employees when the individual has lost his/her job through no fault of their own. Payments can also be received for maternity, paternity, sickness, and caregiver leave.

Like CPP, EI deductions are comprised of both an employee and employer contribution. The maximum employee contribution for 2021 is $889.54, and the employer contribution for 2021 is $1,245.36. As an employer, your duty is to remit both the employee and employer portion to the CRA.

Income Tax

As an employer, the CRA requires that you withhold personal income tax from your employees and remit this amount to the CRA. The amount to withhold is the sum of both federal and provincial tax and is determined using the tax bracket that the individual employee would fall under based on his/her income. Federal and provincial tax rates are stipulated by the CRA and can be found here.

Most payroll software solutions can help you make sure that the tax calculation is accurate.

Calculating Source Deductions

Trying to calculate how much of your employee’s salary you are required to withhold as an employer can get complicated. Most payroll solutions will be able to determine these source deductions automatically for you. In addition, there are other helpful tools online, such as the CRA’s calculator, that can help you calculate source deductions.

Whichever option you choose to calculate source deductions, you need to make sure you are confident in how to use them. A mistake in calculation can become time-consuming to correct, and you will want to avoid that extra cost.

That covers our overview of source deductions.

Employer Health Tax (EHT)

Although not a source deduction, as an employer, you need to be aware of the Employer Health Tax or EHT. EHT is an annual tax that employers in Ontario have to pay to fund the Ontario health insurance plan. EHT is calculated based on a percentage of your total payroll of employees in Ontario. Those percentages vary from 0.98% to 1.95% and are outlined here under “Tax Rates”.

As an employer, you can be exempt from paying EHT provided you meet the following requirements:

• Your annual payroll expense is less than $1 million
• You qualify as an “eligible employer” which is defined as: A private-sector employer. A company that receives financial assistance from the government but is not government controlledCrown Corporation
• Employers with annual payroll expenses greater than $5 million cannot be exempt

Running your payroll efficiently is one of the main priorities of any growing business. Put simply, your employees are your most important asset, and making sure they get compensated accurately is every employer’s responsibility.

This article covered the most straightforward scenario for paying your employees. But if you need to calculate varying hourly wages or if you’ll hire independent contractors, then your payroll process may become more complex.

Additionally, you also have to consider the most effective payment method. Direct deposit, payroll checks, and cards are some of the options that you have to fulfill payments. All these elements, along with keepinc accurate payroll records need to be taken into consideration.

Let us help you.

As an employer, navigating source deductions and the various CRA requirements can get complicated. We can help you make sense of the details. Email us: info@verticalcpa.ca

The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.