As an employer, you’re responsible for paying your staff for the work they do. This often includes bonuses, tips, commissions, vacation pay, salaries or bonuses. You’re also responsible for managing payroll deductions, like taxable benefits, some of which are a legal requirement.
As a business owner, it's crucial to understand your responsibilities when it comes to employer payroll deductions. Failure to deduct correctly can lead to heavy fines for your business. These deductions are paid to the Canada Revenue Agency (CRA).
In this article, we’ll explain the different types of wage deductions, what you’re allowed to deduct for, and how to calculate your deductibles.
What are payroll deductions?
Payroll deductions are amounts of money taken off your employees’ pay cheques each pay period. The amount leftover is the net income, which is what gets deposited in your staff's bank account.
The money deducted is used for various contributions and payments like health insurance, Canada pension plan (CPP) or employment insurance premiums. Deducting income tax is also a way for the government to fund public systems and projects.
Is it legal to deduct money from employee paychecks?
It's legal to make certain deductions on your employee's paychecks. Payroll deductions allowed are either income tax which is a mandatory reduction on every employee's pay stubs, or other amounts reduced for a specific reason, like a payroll error.
In most provinces, you must get the employee's consent before deducting the difference. It's best practice to write the employee a letter letting them know there was an overpayment and possible repayment schedule.
You also have the right to make non-mandatory deductions from your employee's wages. You can deduct an employee's wage for the following reasons:
An error with payroll, for example, an employee being overpaid
Any pay advances you’ve given
The cost of a training course – be aware you can’t deduct the cost of a training course that has no value outside of work
Illegal Payroll Deductions
As an employer, you don’t have the right to deduct wages for everything. You aren’t allowed to deduct pay for the following reasons:
If an employee has broken a tool or equipment
If an employee made a mistake, that cost you money
If there’s something wrong with a product made by an employee
Cost of any uniform (British Columbia and Alberta)
It’s important you don’t make any illegal wage deductions. These deductions could lead to a breach of contract and an employment standards claim.
Can you deduct pay for lateness?
While it's not illegal to deduct an employee's salary when they show up late, you can’t deduct an employee’s wage for being late directly. However, you only have to pay for the time worked. Even if an employee is late by two minutes, you are under no requirement to pay for that time.
You must however still pay for any paid vacation time you’ve authorized.
Which mandatory payroll deductions do you have to make?
When paying your employees, you must subtract payroll tax deductions. Canada Revenue Agency deductions (CRA deductions) are payroll source deductions. They’re a legal requirement for employers and are made up of the following:
Canada pension plan contributions (CPP)
Provincial income tax
Territorial payroll deductions
Employment insurance premiums (EI)
Federal income tax deductions
Employees are also required to make contributions from their wages. Employee deductions are contributions to both EI and CPP. For payroll deduction tables and more information, visit the Canadian Government website.
Generally, the provinces that allow for room and board employment also authorize employers to deduct wages for the lodgings and meals provided in relation to their employment. Employment standards legislation normally prescribes a maximum allowable deduction from an employee’s wages for room and board charges.
What is employment insurance?
Employment insurance gives temporary financial aid to workers no longer receiving a basic salary every pay period. This includes those who can't work because they're on paid leave, like parental leave or workers who are no longer employed.
Not everyone who is unemployed or in need of financial aid qualifies for employment insurance benefits. These payments are only made to people who are eligible and meet the criteria for employment insurance benefits in their jurisdictions.
all workers with insurable earnings must make contributions to employment insurance premiums. since the deductions are made by the employer, anyone who is self-employed must register for the EI program themselves so they can access its benefits if they ever need it.
What does EI cover?
The amount you get from EI varies according to your annual earnings, unemployment rate and maximum insurable earnings. Workers are eligible for these payments if they:
Lost their employment without cause e.g. if they were laid off
Are looking for work but haven't found any yet
Have accrued the minimum number of insurable employment hours that year or since the last time they filed an EI claim
Haven't worked or received pay for 7 consecutive days
Can't work for medical reasons
Can't work because they're on parental leave, pregnancy leave or caring for a critically ill, injured or terminally ill person
How to calculate federal, provincial and territorial payroll deductions
You are responsible for deducting income tax from your employee's salary and sending the correct amounts to the government.
It's important to properly calculate the payroll deductions you make when filling out your employee's T4 payslips because you could face serious repercussions if you submit the wrong amount. You could be liable for a 10% fine (Canadian Government), which would to 20% for a second offence.
Provincial and federal income tax: Add the total tax and subtract it from the basic salary. This amount usually varies according to where your business operates or where the employee lives. You can also use the Government of Canada's approved online calculator.
Employment insurance premium: The employment insurance premium rate is 1.58%. For example, if you pay someone $3000 monthly, the deduction will be $47.40.
Canada pension plan: The contribution rate is 5.95%. If you pay someone $3000 monthly, the deduction will be $178.50. Employers in Quebec should note that the Quebec pension plan deductions are different, so check for the appropriate rates for your province here.
How to submit your deductions online
You can remit your payroll deductions online via the government website. You can also remit your payroll deductions via mail. The payroll deduction form can be submitted monthly or quarterly via your business account in the CRA portal.
How often are deductions remitted to the government?
There are variable payment periods for remitting your payments to the government. You can either pay monthly or quarterly or accelerate your remittances to twice a month.
You must follow your payroll remittance schedule as outlined by the Canadian Government. Your due date is normally based on your average monthly withholding amount (AMWA) from two years ago.
Your AMWA is the sum of all the payroll deductions paid to the CRA within a year, averaged on a monthly basis.
Failure to submit your payroll deduction amount on time could land you with an unneeded charge. The following punishments could be handed down to you:
3% if payment is one to three days late
5% if payment is four to five days late
7% if payment is six to seven days late
10% if payment is more than seven days late or no amount is paid at all
20% for recurring penalties in one calendar year
Changing payroll deductions
When increasing an employee’s salary, you need to make sure you’re deducting the correct EI and CPP amounts. Don’t assume it will stay the same. A penalty of 10% of the amount that should have been deducted can be given.
After-tax payroll deductions
You may also make further non-mandatory payroll deductions to your employee's pay slip. Provided that an employee has given you previous written authorization, common permitted deductions can include union dues, charitable donations, or assorted fees paid through the employer (e.g., parking fees or a gym membership). Permitted deductions as part of an employee benefits package can also include:
Health care benefits.
Private pension plan.
Membership to a workers’ union.
Get help with payroll deductions today with BrightHR
Handling payroll tasks can be challenging for many employers. Staying on top of endless calculations, keeping up with premium rates and changing requirements to arrive at employees' net pay can leave you with a headache.
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