December 15, 2020
Your company is finally gaining traction and you’d like to hire your first employee. Congratulations! Hiring an employee is the first step to scaling your business. However, before you bring someone onboard, there are a number of legal and tax consequences that you will need to consider. In this post we will cover the components of employee compensation including salary and source deductions.
How to do payroll
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 completed TD1 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.
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 breakdown these components to understand how they work:
Canada Pension Plan (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 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 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.
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.
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 software 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.
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 controlled
- Crown Corporation
- Employers with annual payroll expenses greater than $5 million cannot be exempt
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: email@example.com
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.