You’ve come to the realization that you need help and have decided to hire an employee. We won’t get into employee vs. subcontractor here, as we did that in a prior post. We’ll discuss your role as the employer, and what you have to do with the deductions you take off the employee’s wages.
As an employer, you must make deductions on amount you pay to your employees. After you’ve made these deductions, you have to remit them, plus your share, to Canada Revenue Agency (CRA). You must file those deductions either electronically via online banking, at the bank or mail using the form PD7A.
Where Do You Start?
If this is your first employee, then you must sign up for a payroll account with CRA. If you already have a business number then your payroll account number is your nine-digit business number followed by RP0001 (RP designates this as a payroll account). You have to register for a payroll account before the first remittance due date. Your first remittance due date is the 15th day of the month following the month in which you began withholding deductions from your employee’s pay. If you didn’t open an account before hiring employees, you still need to calculate deductions and remit them by the due date. If you fail to deduct or you remit late, you may be assessed a penalty.
The easiest way to open a payroll account is to call CRA at 1-800-959-5525. Have your business number, company information and your information handy when you call.
For every new employee you hire, you are supposed to get them to fill out a TD1Personal Tax Credits Return. The TD1 is used to determine the amount of tax to be deducted from an employee’s employment income. The TD1 also gets the employee’s personal information, such as Social Insurance Number, birthdate, etc.
There are two forms, one for Federal and the other for the Province/Territory where employed. You do not have to send this TD1 to CRA, though you should keep a copy in the employee’s file. The employee only needs to fill out a TD1 again, if there is a change to their entitlements to their personal tax credits amounts.
If your employee has more than one employer or payer at the same time and has already claimed personal tax credit amounts on another TD1 form, he or she cannot claim them again. If his or her total income from all sources will be more than the personal tax credits claimed on another TD1 form, he or she must check the box on the back of the TD1 form ‘More than one employer or payer at the same time’, enter “0″ on line 13 on the front page and should not complete lines 2 to 12.
Now you have to decide how often you will pay your employee(s). The standard pay periods are bi-weekly (every 2 weeks) and semi-monthly (twice per month either the 1st & 15th or 15th & End-of-month). You need to check your provinces employment standards as to how often you pay employees. In British Columbia, you must pay employees twice per month, a pay period cannot be longer than 16 days, and employees must be paid within 8 days after the pay period ends. If you wish to pay an advance to an employee during the month, you are required to make deductions from that advance.
The best pay period, in my opinion, is every two weeks for hourly employees as then you can cut off on a Saturday and then pay the following week (usually Friday). Semi-monthly pay periods work best for salaried employees
The deductions you must make from an employees pay are Canada Pension Plan (CPP), Employment Insurance (EI), and income tax. CPP is currently 4.95% of wages after a $3500 exemption and up to a maximum $2356.20. The employer portion is the same as the employees $2356.20. Employment Insurance is 1.88% to a maximum of $891.12. The employer portion is 1.4 times the employee portion to $1247.57 maximum. Income tax will be based on the employee’s basic personal exemptions, CPP & EI, and other factors.
You must give the employee a pay slip, which states:
- Hours worked and the rate/hour; unless salaried
- Deductions taken off and the amount; CPP, EI, Income Tax
- Taxable benefits added to income
- Year-to-date amounts
Do not put the employees Social Insurance Number on the cheque or paystub.
Making Your Remittance
Generally, you’re remittance is due by the 15th of the month following their withholding. Some larger employers must make remittances more often, but you, more than likely, fit into the 15th category.
CRA prefers if you file your payroll remittance electronically, and will probably make it mandatory in a few years. If you file via online banking, you have to set-up CRA as a payee and then you would follow the directions as per your bank to submit and pay. If you are sending a cheque or paying at the bank you need a PD7A, fill out the form with the total CPP, EI & Income tax deducted, the total remittance, the gross payroll (before deductions), number of employees and the period (Month/Year).
Mary, located in British Columbia, has one employee paying her $1,250 twice a month. The amounts are: CPP $54.66, EI $23.50 & Tax $136.16 for a total of $214.32 and a net of $1035.68. Here’s Mary’s remittance the following month:
Gross Payroll $2,500.00 ($1,250 x 2)
CPP 218.64 ($54.66 x 2 (2 payrolls) = $109.32 x 2 (employer portion)
EI 112.80 ($23.50 x 2.4 (employer portion) = $56.40 x 2 (2 payrolls)
TAX 272.32 ($136.16 x 2 payrolls)
Total Remittance $ 603.76
Mary must make this remittance every month as long as the employee is working for her.
Payroll is a serious business and the monies deducted are considered in trust for the employee, so you must make sure that you remit them on time and every time. You will be held personally liable for any amounts you do not pay the CRA, even if you are an incorporated company. I find it best to use software or CRA’s online payroll calculator, that way you ensure you’re making the correct deductions.