When you work for someone else and are an employee, the taxable deductions from your earnings are usually taken right off your paycheck and remitted to Canada Revenue Agency (CRA) by your employer. If you work for yourself, however, calculating those deductions is your responsibility.
Who Needs to Calculate Payroll Deductions?
Every working citizen that does not have deductions automatically taken from their pay cheque must calculate their own deductions.
Often, an inexperienced entrepreneur will overlook this step – only to be faced with a massive debt in April. To avoid this, calculate your payroll deductions once a month (or every two weeks if you pay yourself bi-weekly). Then you can remit what you owe monthly or save the amount and remit it in one lump sum at tax time.
It is very tempting to skip this step, especially since startups and new businesses are notoriously cash-strapped. However, you’ll be even more cash strapped if you let your tax bill get out of control. Don’t think of your entire earnings as “your money.” Your profit is what you get after deductions and expenses. Get in the habit of setting aside your deduction amount with each paycheck.
How to Calculate Payroll Deductions
Start by going to CRA’s online payroll deduction calculator. Once there, you can verify if you are calculating for a salary, commission, pension, or to verify CPP contributions or EI premiums. (Note that residents of Québec should download the WINRAS calculator from Revenu Québec.)
Next, you will fill in the following details: Name, province/territory, payment frequency, and date of payment.
After that you are required to enter the pre-tax salary and note any applicable vacation pay. This screen is also where you can note any bonuses or retroactive payments. Special deductions or exemptions are noted here too, such as: union dues, maintenance/alimony payments, contributions to a registered savings plan, and housing allowances for clergy.
The final step is to simply input your claim code – there is a drop-down guide with dollar figures on this screen so you can find your code quickly and easily. If applicable, you’ll add your CPP and EI contributions during this final step.
Then you hit “calculate” and a report is generated with your total deduction amount. You can print and/or save a copy.
Remitting
You have a options when it comes to remitting:
- In person at your bank
- Set up the transaction to operate like a bill payment from your bank account
- Use CRA’s My Payment and pay online (VISA Debit, Interac, and Debit MasterCard are accepted. To pay using PayPal or a credit card, you will be directed to an alternate screen)
Getting Help
Even with the online tools, calculating payroll deductions can be daunting, or something you just don’t want to do. In that case you should have your bookkeeper or account, preferably one that specializes in small businesses and works with entrepreneurs, do this for you. While there is a charge to use professionals instead of doing it yourself, you can rest easier knowing your accountant is ensuring your records are maintained and orderly (as long as you work with them to supply the information they need on time). Your accountant can also flag issues you may have overlooked and inform you of deductions for which you qualify.
AF Accounting is dedicated to the needs of small businesses in Canada. For this or other small business accounting questions, contact us today.
Did someone tell you income tax was voluntary? It’s not! Find out the truth behind this misconception on our Canadian Tax Myth blog post.
