Payroll deductions are something all businesses need to consider. However, due to some key differences in how they apply if you are an employer vs self-employed, there continues to remain some confusion about what they are and how they apply to each group.

What Are Payroll Deductions?

Payroll deductions are amounts withheld (or rather, “deducted”) from an employee’s gross pay on their payroll cheque by their employer and can be separated into 2 categories – government-mandated deductions and voluntary deductions (contributions to a private pension plan, RRSP Savings plan, or union dues).

In Canada, the three government-mandated payroll deductions consist of:

Employee contributions to the Canada Pension Plan (“CPP”)
Employee contributions to Employment Insurance (“EI”)
Federal and provincial Income tax

The exact amount for each payroll deduction varies depending on the province of employment. For individual calculations, you can use the Canada Revenue Agency’s (“CRA”) Payroll Deductions Online Calculator to determine the appropriate amounts to withhold.

EMPLOYER

By law, employers are responsible for deducting the above amounts from employee earnings and remitting them to the CRA, in addition to the employer portions of the CPP and EI contributions.

Everything you need to know from opening a payroll account to remitting the deductions and filing your T4 Summary at year-end are outlined on the CRA website.

SELF-EMPLOYED

Generally, if you are a sole proprietor, a partnership, an independent contractor, etc., you are considered to be self-employed.

Unlike employers, monthly remittances for CPP and income tax are not required throughout the year. Instead, contributions are calculated upon filing your personal tax return each year. As a self-employed individual, you are responsible for both the employee and employer amounts, which is based on the net income of your business, subject to the same maximum contribution.

However, self-employed individuals do not have to pay EI premiums, unless they opt into the EI benefits for self-employed program which provides special benefits to the self-employed such as sickness or maternity benefits.

PENALTIES

The reason it is important to be on top of your payroll deductions is that you will be charged high penalties if you do not, even if you are just 1 day late.

These penalties are based on a percentage of the payroll deduction amount (Ie. CPP, EI, Income tax) that should have been withheld & paid. While it starts at 3% for payments 1 to 3 days late, it quickly gets up to 10% if it is more than 7 days late or not remitted.

Furthermore, if you are assessed this penalty more than once in a calendar year, the CRA will apply a 20% penalty on these failures if they were made knowingly or under circumstances of gross negligence.

SUMMARY

Regardless of your situation, if you are an employer that needs assistance with payroll planning, registration, calculation, or self-employed and looking for ways to efficiently structure your business around the above considerations, please contact your Avisar professional for more information.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.