When most people think about payroll, they frame it in the context of paying employees. The problem is, that’s only part of the picture. In addition to paying employees for their work, running payroll is also necessary to cover an employer’s payroll tax obligations.
If you’re an employer in Canada, it’s important to have a solid grasp of payroll taxes. This information is especially valuable when making the switch to a new provider, so that you can make sure you’re not underpaying or overpaying the CRA.
Below, we cover the basics of payroll tax and the obligations of each Canadian employer. We also cover Year to Dates (YTDs) and explain why these are so important when switching payroll providers.
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Income Tax vs Payroll Tax
Before getting into the nitty-gritty, it’s important to make a key distinction between income tax and payroll tax. In the context of small businesses, income tax is a type of deduction that the employer must withhold (take out) of each paycheque. The amount of income tax that you need to withhold can be found on the CRA payroll deduction tables.
Employers must also deduct federal taxes such as CPP contributions, EI premiums, as well as any applicable provincial employer taxes (source deductions). These income taxes, federal taxes, and provincial taxes are all grouped together as payroll taxes.
The difference is, income tax simply requires employers to withhold amounts from an employee’s pay, while EI and CPP require employee and employer contributions. The breakdown looks like this:
- CPP: the employer must match the amount deducted from the employee’s paycheque.
- EI: the employer pays 1.4x the amount withheld from the employee’s paycheque.
For provincial and territorial payroll taxes, you can consult the CRA’s T4032 Payroll Deductions Tables.
Employer Tax Responsibilities
As an employer, you need to deduct income tax every time you pay an employee. This includes both federal income tax, and provincial or territorial income taxes. However, you do not need to do this when you pay independent contractors because contractors are responsible for managing their own income taxes.
Remitting Your Taxes
Okay, so you’ve withheld the correct income tax for each employee. Now what? As tempting as it may be to treat those funds like a short term loan, keep in mind that you need to remit (pay) these funds to the CRA on a regular basis—generally monthly or quarterly.
The timing of when you have to send your payroll taxes to the CRA depends on the average amount of payroll taxes you collect each month. In other words, your remitter type is based on your average monthly withholding amount (AMWA), from two calendar years ago (or from one month ago if you are a new employer). Your AMWA is the total of all the Canada Pension Plan (CPP), employment insurance (EI), and income tax you had to remit for the year, divided by the number of months (maximum 12) that you had to remit for. The CRA reviews your remitter type each year and will notify you if your remitter type changes.
Most businesses will be non-accelerated remitters, but you should always double-check before you enter your information because there are significant penalties for getting this wrong.
While you can calculate withholding amounts and manage remittances on your own, payroll software generally automates most of this process and help you avoid any missed payments to the CRA.
Year to Dates (YTDs) and Switching Providers
Now here’s where you need to pay extra close attention if you’re switching payroll providers. Even if you’re well versed in payroll taxes, things get a little tricky when you’re using brand-new payroll software.
To set up payroll with your new provider, you will need accurate YTD amounts for all employees—this includes contractors and terminated employees if you plan to have your new provider help with year-end for terminated staff as well.
For those unfamiliar, YTD amounts include all of the historical payroll transactions (what net amounts have been paid out, what has been remitted to the CRA) associated with each individual employee in a given calendar year so far. Only the current year's information is necessary. If you are running your first payroll with a new provider in January (with your first payroll in the new calendar year), you can completely skip the YTDs—just make sure you still have the data, or that your previous provider will still help you with T4s.
It’s crucial to have the correct YTD amounts when setting up your employees in your new payroll system. Accurate YTD amounts will ensure that you’re paying the correct amount of payroll taxes, and not over or underpaying. It’s especially important to ensure that YTD amounts are accurate before you run your first payroll with your new provider. This is because the YTD amounts need to be accurate in order for the T4s to be correct at the end of the year. If you’re switching providers, YTD amounts can be found on the payroll register report, which includes all the YTD amounts of employee and employer incomes and deductions.
YTDs are also important when issuing a Record of Employment (ROE). ROEs are issued whenever an employee experiences an “interruption of earnings,” such as when they are let go or fired. ROEs must also be issued when you move your data from one payroll system to another. YTDs help you report the correct amounts of EI contributions when issuing these ROEs.
If your YTD amounts are not correct, you may be over or underpaying your payroll taxes. As you might have guessed, this will result in a PIER review—something you definitely don’t want to deal with. Luckily, once you’ve entered the correct YTDs in your new payroll system, the software will take it from there so payroll tax is no longer a nagging worry.