Here we take a look at what federal and provincial payroll taxes you will be to pay, and the rules and exceptions that apply. Let’s break them down.
What are payroll costs?
Employers are required to make several tax payments whenever they pay employees. These are known as payroll taxes. Most of the money comes out of the employee’s wage or salary, but the employer pays some, and some you will be sharing with your employee.
Federal versus provincial payroll taxes
Federal payroll taxes are the same for all Canadian businesses (exception for Quebec). Province payroll taxes change depending on where your business is.
Let start by figuring out your federal payroll taxes, and then we’ll cover your provincial taxes.
Three federal payroll taxes
The three federal payroll taxes are:
- Canadien Pension Plan*
- Employment Insurance
- Income tax
*Quebec Pension Plan for Quebec
Canadien Pension Plan (C.P.P.)
- 10.20% of employee earnings.
- The first 3,500 $ of the employee’s earning is exempt. Split over each pay period.
- Half (5.10%) comes out of their pay. The employer pays the other half.
- You should deduct on employee earnings up to the annual wage limit set 5,497.80 $ on 2019.
Employment Insurance (E.I.)
- 3.24% of employee earnings.
- Half (1.62%) comes out of their pay. The employer pays the other half.
- You should deduct on employee earnings up to the annual wage limit set 1,720.40 $ on 2019.
Federal income tax deductions
Federal income tax is more complicated than C.P.P. and E.I. It’s entirely paid from the employee’s earnings but the rate changes depending on how much they make. Moreover, your employees can claim their personal tax credits that lower their tax bill. To do so, they need to file a TD-1 form.
However, it is employers responsibility to deduct the right amount of income tax based on the employee’s earnings. Slight under or overs will be sorted out between the Canada Revenue Agency (C.R.A.) and your employee when they complete their annual tax return.
Three provincial payroll taxes categories
The three provincial payroll taxes categories that you can find in your province. You will need to verify which are applicable in your province:
- Provincial Income Tax
- Health insurance plans
- Worker compensation
Provincial income tax deductions
Provincial income tax is quite similar to the federal income tax, only the rates, and brackets that may change. The easiest one will be the northern territory income tax which is a flat 2% on all earnings.
Health insurance plans
The are many provincial health insurances in Canada, some will be paid out of the employee’s wage or salary, but the employer pays some, and some you will be sharing with your employee. You should check with your payroll provider about which applies in your province.
Each province has its department of labor as it is a provincial jurisdiction. Nonetheless, federal employees, are under the federal labor law. As a tea business, there will be only a provincial for you, and the employer usually pays it. The rate varies in each province and also varies depending on how your business is classified. A tea house will have a different rate than a tea wholesaler.
Calculating employee income tax
You need three pieces of information to estimate income tax for an employee:
- How often they’re paid (daily, weekly, bi-weekly, monthly)
- Their claim code from their TD-1
- The amount you’re paying them
There are a few methods for working out how much to withhold. One of the most common is to use the Payroll Deductions Tables.
So what are employer payroll taxes?
As we’ve seen, some payroll taxes come out of an employer’s expense account rather than the employee’s salary or wages. These are the federal and provincial employer payroll taxes:
- Canadien Pension Plan – 5.10%
- Employment Insurance – 1.62%
- Health insurance plans
- Worker compensation
Keep all of the employer payroll taxes in mind when budgeting to hire staff. They are additional costs, over and above salary and wages. As a rule of thumb, you can use 10% over the gross salary you will be paying for your budget. However, for a more accurate cost, you can speak with your payroll provider they should be able to come up with the exact amount that you should be paying over the year.
Staying on top of your payroll
Payroll tax deductions can change depending on an employee’s circumstances and also when the different government and authorities change them. Moreover, labor law is broad and cover many facets of your relationship with your employee. Sometimes it does feel overwhelming to keep track of all this data and stay compliant.
For that reason, small businesses often use a payroll provider like Tea Ledger to the math and to help the business owner stay compliant with the different authorities.
Whatever system you use, make sure you keep your payroll provider update about the employee payroll records regularly. Your employees are supposed to tell you about significant changes that affect their deductions, but they may not remember to. Ask them if anything on their TD-1 has changed every year.
Ready to start your payroll? We are here to help in the case you have any question.