Payroll Deductions: How Much Should You Be Paying?

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In 2017, small businesses in British Columbia were responsible for almost 1.1 million jobs - or 44% of the province’s total employment.

If you are a BC-based small business owner - and you’ve decided to do your payroll - it’s essential that you pay your employees correctly. However, it's also crucial that you thoroughly understand payroll deductions and how much you should be remitting to the Canada Revenue Agency (CRA).

Here’s what you need to know about payroll deductions and remitting employee payroll deductions from your business account.

What Are Your Responsibilities As An Employer?

As an employer, you are responsible for accurately calculating mandatory employee deductions and employer contributions to your employees’ salaries. You are also responsible for remitting these deductions to the CRA at the right time.

To get started, you will have to obtain the employee's Social Insurance Number (SIN) and a completed form TD1. This determines the amount of tax you will have to deduct from their employment income.

If more than the federal basic personal amount is claimed, then the employee will also have to complete a provincial TD1BC (British Columbia) form. Completed forms are kept with you for your records and not submitted to the CRA.

You will also have to set your business up with a CRA payroll program account. This account will identify your organization with the CRA and enable you to remit the necessary payroll deductions to them.

Your next step is to calculate and make the required deductions.

Which Payroll Deductions Are Required By Law?

In most cases, you’ll remit employee deductions and contributions to the CRA every month as part of your payroll process.

For each employee, you’ll be expected to calculate:

Canada Pension Plan (CPP) contributions
Employment Insurance (EI) premiums
Income Tax deductions

How Much Tax Is Deducted From an Employee's Paycheck?

These deductions are based on an employee's earnings; therefore, the deductions will differ for each employee.

CPP Contributions

The CPP program pays a pension to contributors upon retirement. Still, it can also partially replace earnings to the contributors' families in case of disability or death.

The CPP contribution rates, maximums, and exemptions table tells you exactly how much you must deduct for each employee's CPP. As an employer, you’re also responsible for contributing an equal amount to the employee’s pension plan.

Employment Insurance (EI) Premiums

EI premiums qualify employees for financial assistance from the Government of Canada in certain unforeseen circumstances when they cannot work for prolonged periods. For example, extended absences include personal illness or caring for seriously ill family members.

Premiums are calculated based on a rates and maximums table. But as an employer, you’re also responsible for contributing 1.4 times the amount deducted from each employee’s salary.

Income Tax Deductions

Income tax should also be deducted from your employees’ pay. Both federal and provincial income tax rates will need to be included to deduct the right amount of tax.

Although federal tax rates are the same across Canada, each province and territory has its own rate. This is deducted based on the employee’s taxable income and their personal tax credits. The federal tax rates are progressive, starting at 15% on the first bracket of taxable income and increasing to 33% for the highest earners.

For example, in Alberta, the provincial income tax rate is 10% on the first $131,220 of income, while BC's provincial income tax rate is 5.06% on the first $40,707. British Columbia has a progressive tax structure with several brackets, starting at 5.06% and going up to 20.5% for incomes above a certain threshold.

You can use an online payroll calculator like the CRA’s Payroll Deductions Online Calculator to find the appropriate amounts for your CPP contributions, EI premiums, and income tax deductions.

You should, however, note that maximum earnings and contributions for CPP and EI change annually. A payroll deduction calculator will need to be updated accordingly with this information.

To remain compliant, you should consider reviewing the CPP and EI rates and maximum tables yearly in December. This prepares your organization for upcoming changes in the new year and ensures accurate calculations.

Employer Health Tax

If you are a BC-based small business with an annual payroll of $500,000 or more, you’ll be required to pay the Employer Health Tax (EHT), effective January 1, 2019. The EHT is a payroll tax that is based on employment income. More information is available on the gov.bc.ca website.

Other Deductions

Mandatory payroll deductions are not the only ones that come into play in BC. In addition to CPP, EI, Income Tax, and Employer Health Tax, there are also other deductions you should know about.

Union Dues Deductions

If you employ unionized individuals, you may have to deduct and remit union dues or other fees on their behalf. Union dues are set by bargaining agents and are usually calculated using a fixed rate or a percentage of the employee’s salary.

You should be prepared to collect dues directly from employees' paychecks if they have permitted you to do so. You will then remit those amounts to the appropriate bargaining agents every month.

As an employer who deducts union dues, you must also detail the amounts withheld on each pay stub. You must report the total dues paid annually when filing the T4 for a unionized employee.

The tax structure surrounding union payments can be quite complicated. If your business works in a unionized environment, you should seek help from a payroll professional. This ensures that your organization is accurately deducting, remitting, and reporting union dues, union fees, and any associated taxes.

Legal Deductions and Garnishment

Garnishment is a way for creditors to collect a debt. If one of your employees owes money, making them a debtor, the creditor may contact you through a third party to get this money back. This process is called garnishment.

First, the creditor will go to court and obtain a court order, asking for the money they are owed from the debtor. When the creditor serves you a garnishing order, you must send a portion of the debtor’s wages to the court, and they will then reassign money to the creditor upon confirmation.

There are laws in place to protect the debtor regarding how much money the creditor can demand. In most cases, no more than 30% of the debtor’s net income can be collected. However, when the creditor relies on the money for child support, the quota increases to 50%.

Note: the provincial laws in BC state that an employer may not dismiss or discriminate against an employee due to their outstanding debts or after being served with a garnishing order.

Compulsory Company Deductions

Compulsory company deductions are a condition of employment. Although compulsory, they still require the employee's written consent before you can take the deductions from your employee's wages. Some of these deductions could be tax-deductible.

Examples of compulsory-company deductions can include:

Voluntary Deductions

Employees can decide whether they want a portion of their wages to be automatically donated to a charity. Within a month of being filed, the assigned wages must be sent and received by the designated organization.

Social club deductions are not tax deductible, but in essence, they provide deductions when an employee joins the company’s social club. If the club's main purpose is recreation, deductions are not acceptable. Examples of clubs where fees can be deducted are boards of trade or business associations.

What Are Your Year-End Payroll Responsibilities?

You will usually remit employee payroll deductions and contributions to the CRA every month as part of your payroll process.

You have to perform a payroll reconciliation to ensure you have remitted the correct amount to the CRA. This is done through a T4 Summary that reconciles the amount you actually remitted with the amount you were supposed to remit. This summary reports the total of all amounts reported on the individual T4 slips. Any shortfalls must be paid to the CRA, while overpayments will be refunded.

You will also have to generate a T4 Slip for every employee with their payroll information for the year. This has to be filed and sent to every employee by the end of February following the year of remuneration. For example, the T4 slips for 2019 have to be filed and sent to your employees by the end of February 2020. These slips report the total amount of earnings, taxes withheld, and other deductions for the year.

Record of Employment (ROE): Employers must issue an ROE for employees who leave their jobs or experience an interruption in earnings. This document is essential for employees to apply for Employment Insurance (EI) benefits.

CPP and EI Reconciliations: Ensure that all Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums have been correctly calculated and remitted. Any discrepancies need to be adjusted.

Updating Employee Information: Verify and update employee records, such as Social Insurance Numbers (SINs) and addresses, to ensure accuracy in reporting.

Specific Responsibilities for British Columbia

Employer Health Tax (EHT): Employers in BC with a payroll over a certain threshold are required to pay the Employer Health Tax. This needs to be calculated, reported, and paid annually, with the deadline for payment and filing being March 31st of the following year.

Specific Responsibilities for Alberta

No Provincial Health Tax: Unlike BC, Alberta does not have a health payroll tax, which simplifies year-end reporting slightly for employers in Alberta.

Workers’ Compensation Board (WCB) Reporting: While relevant in both provinces, the specifics can vary. In Alberta, employers need to ensure that they report payroll and pay premiums to the Alberta WCB. The deadline for the previous year's payroll is typically the end of February.

You can also use this Employer's guide from the Canadian government to learn more about payroll deductions and remittances.

Need help with your payroll?

As a BC-based small business owner, you must know how much you should be deducting and remitting on behalf of your employees. To meet this obligation, you should ensure your payroll systems and processes are up-to-date and robust enough to cope with the necessary calculations, regulations, and remittance requirements.

For many entrepreneurs, managing payroll and payroll deductions can quickly become a confusing, time-consuming task that contributes little to their business growth. At Enkel, we provide business owners in Vancouver, Kelowna, Victoria and more with reliable, end-to-end Payroll Management services, giving you peace of mind as you focus on growing your business.

Payroll Deductions – How Much Should You Be Paying?