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Payroll Deductions: What are they and how to calculate them

What is a Payroll Deduction

Payroll deductions are an amount of money withheld from a paycheck by an employer to be used to pay taxes and cover any benefits that are provided such as retirement contributions or health insurance premiums. It is the responsibility of the employer to calculate and collect the correct amount from the employee’s gross pay before issuing a paycheck

Common Types of Payroll Deductions:

There are a few reasons why an employer may need to deduct money from an employee’s paycheck; some of these are mandatory and some are optional. Below is a list of common payroll deductions.

Mandatory Deductions

Income Taxes:

These are the federal, provincial, and municipal income taxes that employees are required to pay. The amount that should be deduced depends on their income bracket and their location

Federal Tax Bracket

Tax Bracket

Tax Rates

$49,020 or less


$49,020 to $98,040


$98,040 to $151,987


$151,987 to $216,511


More than $216,511


Provincial/Territorial Tax Brackets


Tax Rates

British Columbia

5.06% on the first $42,184

7.7% on the next $42,185

10.5% on the next $12,497

12.29% on the next $20,757

14.7% on the next $41,860

16.8% on the next $62,937

20.5% on any amount over $222,420


10% on the first $131,220

12% on the next $26,244

13% on the next $104,976

15% on any amount over $314,928


10.5% on the first $45,677

12.5% on the next $84,829

14.5% on amounts over $130,506


10.8% on the first $33,723

12.75% on the next $39,162

17.4% on any amount over $74,885

Newfoundland and Labrador

8.7% on the first $38,081

14.5% on the next $38.080

15.8% on the next $59,812

17.3% on the next $54,390

18.3% on amounts over $190,363

Nova Scotia

8.79% on the first $29,590

14.95% on the next $29,590

16.67% on the next $33,820

17.5% on the next $57,000

21% on amounts over $150,000

Prince Edward Island

9.8% on the first $31,984

13,8% on the next $31,985

16.7% on amounts over $63,969


5.05% on the first $45,142

9.15% on the next $45,145

11.16% on the next $59,713

12.16% on the next $70,000

13.16% on amounts over $220,000


15% on the first $45,105

20% on the next $45,095

24% on the next $19,555

25.75% on amounts over $109,755

New Brunswick

9.68% on the first $43,835

14.82% on the next $43,836

16.52% on the next $54,863

17.84% on the next $19,849

23.3% on amounts over $162,383

Northwest Territories

5.9% on the first $44,396

8.6% on the next $44,400

12.2% on the next $55,566

14.05% on amounts over $144.362


6.4% on the first $49,020

9% on the next $49,020

10.9% on the next $53,938

12.8% on the next $348,022

15% on amounts over $500,000


4% on the first $46,740

7% on the next $46,740

9% on the next $58,498

11.5% on amounts over $151,978


Canada Pension Plan (CPP) Contributions:

It is both the employee and employer’s responsibility to contribute to the CPP. This allows the employee to have retirement benefits and disability benefits.

Employment Insurance (EI) Premiums:

Employees are required to pay into EI. These premiums are deducted from an employee’s pay to help fund temporary financial assistance for individuals who are unemployed or unable to work due to specific reasons.

Quebec Parental Insurance Plan (QPIP) Premiums

In the province of Quebec, QPIP premiums should be withheld from the employees paycheck to fund the province’s parental insurance program. This program provides paid parental leave to eligible parents.

Canada Student Loan Deductions

In some cases if an employee has an outstanding federal student loan, a portion of their pay may have to be deducted to repay this loan.

Wage Garnishments

Wage garnishments may need to be deducted if they are Court-ordered to repay debts such as child support or back taxes.

Optional Payroll Deductions

Retirement Contributions

Employees have the option to contribute a portion of their earnings to employer-sponsored retirement plans like Registered Retirement Savings Plans (RRSPs) or Pension Plans. This is optional and an employee can opt out of this.

Health and Group Insurance Premiums:

Employees may want to take advantage of their employer’s health, dental, or group insurance plan. In this case, the premiums should be deducted from their paycheck.

Charitable Donations:

Some employers offer the ability to make voluntary deductions to be contributed to a charitable organization. If an employee chooses to opt into this they can choose a set amount for deduction.

Savings Plans:

Some employers may offer to allow their employees to choose to have funds deducted from their pay and deposited directly into a savings account or an investment account.\

Union Fees:

If an employee is a union member they need to pay a union fee. In this case this fee may have to be deducted from their pay.

Employee Stock Purchase Plans:

Some companies offer ESPP options to their employees, allowing them to purchase company stock through payroll deductions.

Transit Pass or Parking Benefits:

In certain locations, employees can choose to have the cost of transit passes or parking deducted from their pay with tax benefits.

How To Calculate Payroll Deductions:

Calculating payroll deductions in Canada doesn’t have to be complicated. follow these step to ensure you are paying the right amounts and are remaining compliant:

Determine the Gross Pay:

The first step is to calculate the total earnings of the employee before deductions, including all regular wages, overtime pay, and bonuses.

Calculate Federal Income Tax:

The next step is to calculate the tax owing amount on the paycheck. To do this use the employee’s taxable income and the federal tax rates provided by the CRA, that applies to their income bracket, to calculate the federal income tax deduction.

Calculate Provincial Income Tax:

Once the federal tax has been deducted the provincial tax must be deducted. Using the employee’s taxable income amount, choose the provincial tax rate that applies to calculate the provincial income tax deduction.

Calculate Canada Pension Plan (CPP) Contributions:

Once the tax amounts have been calculated and deducted, you must determine the gross earnings up to the annual maximum pensionable earnings then use the CPP contribution rates provided by the CRA to calculate the employee’s contributions.

Calculate Employment Insurance (EI) Premiums:

To calculate the EI contribution, you should take the gross earnings up to the annual maximum insurable earnings (YMIE) and then use the EI premium rates provided by the CRA to calculate the employee’s EI premiums.

Subtract Other Mandatory Deductions:

If you are located in a province with any other mandatory deductions such as QPIP premiums (for Quebec employees) or court-ordered wage garnishments. These must also be calculated and deducted from the paycheck.

Subtract Voluntary Deductions:

If the employee has opted into any voluntary deductions, these amounts should also be deducted from the pay. These would include contributions to retirement plans (e.g., RRSPs), health insurance premiums, charitable donations, or other voluntary programs.

Calculate Net Pay:

Once these deductions have been subtracted from their gross pay, you have determined the final amount they will receive on their paycheck.

Handing payroll requires the management of documents and receipt, it is important to keep this information in a central and secure place. LedgerDocs streamlines your payroll process by securely storing relevant documents, making it easier to access and share important information during the payroll process allowing you to have all relevant information you need to calculate any deductions. Start your free trial today and see how simple effective document management can be.

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