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 | 15% |
$49,020 to $98,040 | 20.5% |
$98,040 to $151,987 | 26% |
$151,987 to $216,511 | 29% |
More than $216,511 | 33% |
Provincial/Territorial Tax Brackets
Provinces/Territories | 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 |
Alberta | 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 |
Saskatchewan | 10.5% on the first $45,677 12.5% on the next $84,829 14.5% on amounts over $130,506 |
Manitoba | 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 |
Ontario | 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 |
Quebec | 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 |
Yukon | 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 |
Nunavut | 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.
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