Your business is growing and you’ve just hired your first employee. Yet before you issue your first pay stub and get on with your business, you’ll want to make sure you cover your payroll responsibilities!
So just what exactly are your payroll responsibilities?
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.
How are payroll deductions calculated?
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.