As an employer, you’re responsible for remitting employment insurance (EI), Canada pension plan payments (CPP) and income tax on behalf of your employees. The concept of withholding taxes on employee’s salaries goes back a number of decades and is now common across many countries.
The thought is that taxpayers need to pre-pay their income taxes throughout the year otherwise they won’t have anything left to pay the government at year-end!The responsibility is then placed on the employer to remit those amounts to the CRA on the employee’s behalf.
At the end of the year, you’ll need to produce a T4 information return- a record of the employer’s salary and what was remitted on their behalf.
The CRA has a special formula for calculating the proper remittances. For income tax purposes, the idea is to closely lineup an employee’s salary with their respective income tax bracket. In a perfect world, when they file their T1 personal tax return in April, no further income taxes would be owing and no refund would be issued. Tax refunds arise when additional deductions that weren’t accounted for such as child care, donations, or medical expenses are claimed by an employee.
For CPP and EI, there is both an employee and employer portion.
As an employer, that means if you pay out a salary of 40K, you’ll need to factor in an additional 2-3K (as amounts vary per year) for these amounts on top of the original salary.
You can put your calculator away as the CRA has an online payroll calculator that’s relatively easy to use. Once you input the gross amount of your pay for a period, it will tell you what exactly needs to be remitted for CPP, EI and income tax.
You can then go ahead and make the remittance using the CRA My Payment portal or through online banking. When you pay your employee, make sure you pay them the net amount - ie. their pay less the remittances– otherwise you’ll be giving them a healthy bonus!
There are a number of Canadian payroll apps you can use to automate payroll but each one will have its own strengths and weaknesses. Keep in mind that the cheapest and simplest way to pay an employee will be through using the CRA calculator as any third party application will have a cost to it – both financially and the time investment in learning the new process.If you only have one employee, you may not need to invest the time and money in a third party app.
However, if you’re looking at growing your business, managing payroll with a spreadsheet and the CRA calculator may prove challenging.
Most Canadian banks will have their own payroll options through online banking services. The downside is that you’ll likely need to produce your own T4 returns at the end of the year and be quite self-sufficient when it comes to payroll support questions.
If you’ve got better things to do and want to outsource your payroll completely, you can check out Wagepoint or Humi.
Their service comes with a cost but at least you’ll have someone else worrying about the remittances and year-end reporting.If you’re not ready to completely outsource payroll, you can then check out some of the online payroll processing apps. Before moving ahead with a specific app, you’ll need to understand what functions are important to you and prioritize. Is customer support important to you? Do you have a lot of complex deductions? Would you like it to integrate with your online accounting system?Once you narrow down your goals, you can check out some of these online payroll options: Wagepoint, Simplepay, QBO payroll, Wave payroll, Payment Evolution, and Payworks. Each one will have its own unique set of strengths so make sure you do some research to ensure the app lines up with your expectations.
Given the number of options out there, you may want to consult your accountant to decide on the best payroll method that’s right for you.
Josh is the co-founder and CEO of LiveCA.