Make The Appropriate Payroll Deductions
Before you make deductions, be sure you have added any taxable benefits to your employees’ pay. Do you provide an employee with board and lodging, the use of a company car, parking, or a low-interest loan? Anything you provide an employee in addition to their cash wages may be considered a taxable benefit.
And if an employee’s pay involves taxable benefits, these need to be added to their income each pay period before you make any payroll deductions. The total income determines the total amount that is subject to CPP contributions, EI premiums, and income tax deductions.
The CRA’s Guide T4130 gives details on how to calculate the value of these benefits and which taxable benefits are subject to GST/HST.
Once you have all taxable wages and benefits accounted for, you’re ready to make your Canadian payroll deductions. Generally, employers need to make the following three government program deductions from employees’ pay:
Refer to the CRA’s chart of EI premium rates and maximums to determine the EI deductions for a given year. Note that there is a separate chart for Quebec, which has a different rate structure.
How To Calculate Employer Payroll Taxes
Payroll taxes are figured according to an employee’s Form W-4. This form tells the employer the employee’s marital status and whether additional withholding should be made to cover certain personal taxes to which an employee may be entitled that reduce his or her income taxes. If no W-4 is provided, then an employer withholds as if the employee were single with no other adjustments.
Employers relying on outside payroll service providers, such as Paychex, can leave the calculations to them. Some employers who do payroll in-house use software or rely on tables provided by the IRS in Circular E to calculate payroll taxes.
How To Calculate Payroll Taxes
Weve reviewed some of the base rates for payroll taxes already, but lets lay them all out so you have an idea of how to calculate payroll taxes for your organization. Some of these funds you will withhold from employees paychecks while others you will pay as an employer. Here are the taxes you should factor in per employee:
- 6.2 percent of the employees wages for social security that your org pays
- 6.2 percent withheld from the employees paycheck for social security
- 1.45 percent of the employees wages for Medicare that your org pays
- 1.45 percent withheld from the employees paycheck for Medicare
- 6 percent of the first $7,000 of an employees wages for the year for FUTA
- Your states tax rate for state unemployment
- Withheld amount as designated by the employees W-4 form
Fortunately, you dont have to memorize all these rates yourself. There are numerous payroll tax calculators online, and the best payroll software providers can help you sort through all the rules and regulations as well.
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Employees Of A Temporary
You may be the proprietor of a temporary-help service firm. Temporary-help service firms are service contractors who provide their employees to clients for assignments. The assignments may be temporary, depending on the clients needs.
Workers of these firms are usually employees of the firms. As a result, you have to deduct CPP contributions, EI premiums, and income tax from the amounts you pay them. You also have to remit these deductions and report the income and the deductions on a T4 slip.
If you or a person working for you is not sure of the workers employment status, either one of you can request a ruling to determine the status. If you are a business owner, you can use the Request a CPP/EI ruling service in My Business Account. For more information, go to My Business Account.
A worker can ask for a ruling by using the My Account service, at My Account for Individuals and selecting Submit documents and then You may be able to submit documents without a case or reference number.
For more information, see Guide RC4110, Employee or Self-Employed?
Special Or Extra Duty Pay For Police Officers
Police forces regularly allow their police officers to provide security and other special or extra duty services to third parties for events.
We consider a third party that pays special or extra duty pay to police officers to be their employer. The third party has to do all of the following:
- withhold CPP contributions, EI premiums, and income tax from SEDP when the payment is made to a police officer
- remit these deductions to us
- report the SEDP and deductions on a T4 slip
However, we administratively allow the individual police forces, who are the regular employers of the police officers in question, the option to assume these responsibilities instead.
If the police force does not assume the responsibility for withholding remitting, and reporting, it is the third partys responsibility to do this. In such a situation, the third party may have to put the police officer on payroll as a part-time employee.
Under the administrative option, the police force can take into account the CPP contributions and EI premiums previously deducted from the police officers regular salary and SEDP when determining the maximum CPP pensionable and EI insurable earnings for the year.
To determine how much income tax to deduct, the police force should use the method described under Bonuses, retroactive pay increases, or irregular amounts.
For more information, go to Police forces and extra duty.
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Employer’s Annual Or Final Summary Of Virginia Income Tax Withheld
All filers must file Form VA-6, Employer’s Annual Summary of Virginia Income Tax Withheld or Form VA-6H, Household Employer’s Annual Summary of Virginia Income Tax Withheld. The VA-6 and VA-6H are due to Virginia Tax by of the following calendar year, or within 30 days after the final payment of wages by your company. You may file your VA-6 or VA-6H using eForms, Web Upload, or your Business Account.
When you file Form VA-6, you must submit each federal Form W-2, W-2G, 1099, or 1099-R that shows Virginia income tax withheld. You must submit these forms electronically using eForms or Web Upload.
Wages In Lieu Of Termination Notice
When you pay an employee an amount in lieu of termination notice under the terms of an employment contract or federal, provincial or territorial employment labour standards, the amount is considered employment income, whether or not it is paid on termination of the employment.
Deduct CPP contributions, EI premiums, and income tax. To determine the amounts to deduct, include the wages in lieu of termination notice with the regular income, if any, for the pay period.
Use the bonus method that we explained under Bonuses, retroactive pay increases, or irregular amounts to determine the amount of tax to deduct from the wages in lieu of termination notice.
For more information, see archived Interpretation Bulletin IT-365, Damages, Settlements and Similar Receipts.
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Late Remittance And Penalties
The CRA can apply a penalty if the following occur:
- You deduct the amounts but dont remit them to the CRA
- You deduct the amounts but send the remittance late to the correct agency
These are the penalties:
- 3% for amounts one to three days late 5% for amounts four or five days late 7% for amounts six or seven days late
- 10% if the amount is more than seven days late or if you dont remit any amount
When you set up your companys payroll online, you need to make sure that you do it correctly the first time to ensure everyone gets paid on time and you avoid penalties. To ensure your payroll set goes smoothly consider adding a trusted payroll software like QuickBooks. Add online payroll today and streamline the payroll process.
How To Pay Employer Federal Taxes
As an employer, there are a number of federal taxes you need to pay that relate to your employees.
For information on the third coronavirus relief package, please visit our American Rescue Plan: What Does it Mean for You and a Third Stimulus Check blog post.
As an employer, you not only have to report the taxable income of your business, but there are a number of other federal taxes you need to pay that relate to your employees. This includes federal income tax withholding, Social Security, Medicare and unemployment taxes. Each type of tax has specific payment deadlines and forms you need to send to the IRS.
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Deposit The Tax To The Proper Agencies
Deposit schedules are either quarterly or annually. Your deposit schedule is determined by the total tax liability reported on Form 941, line 12, or Form 944, line 9, during your lookback period.
Your lookback period helps you figure out the deposit schedule for payroll taxes. A lookback period operates by adding up your quarterly or annual tax liability, the sum of which decides your deposit schedule. For instance, if your total tax liability is under $50,000, youll deposit every month. Conversely, if your total tax liability is over $50,000, youll deposit semi-weekly.
Heres how it works.
If you use Form 941, report your taxes quarterly. This system of dividing the year into fiscal quarters will be the same way your lookback period operates. Your lookback period starts July 1 and ends June 30 the next year. So, if you wanted to determine your deposit schedule for 2023, your lookback period would begin July 1, 2021 and end June 30, 2022. Here are the quarters your lookback period would cover for a 2023 deposit schedule:
If you use Form 944, things are more straightforward. Because Form 944 reports your taxes on an annual basis, you dont have to add up the quarters to understand your total tax liability. Instead, youll look at your annual tax liability. But, it can still be a bit tricky.
Once you add up your tax liability using either the quarter or annual method, youll be able to find when you need to make your deposits. If your annual tax liability is:
Federal Unemployment Tax Act
The federal government doesn’t pay unemployment benefits but does help states pay them to employees who’ve been involuntarily terminated from their jobs. To fund this assistance to the states, there’s FUTA, which is a tax created by the Federal Unemployment Tax Act. The tax applies only to the first $7,000 of wages of each employee. The basic FUTA rate is 6%, but employers can receive a credit for state unemployment tax of up to 5.4%, bringing the net federal rate down to 0.6%, or a maximum FUTA payment of $42 per employee.
However, the credit is reduced if a state borrows from the federal government to cover its unemployment benefits liability and hasn’t repaid the funds. Then such state becomes a “credit reduction state” and the credit reduction means the employer pays more FUTA than usual.
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Federal And State Unemployment Insurance Taxes
Both federal and state unemployment insurance taxes are paid entirely by the employer.
FUTA taxes are owed if you paid a minimum of $1,500 in wages in the previous calendar year or quarter. Deposits are due the last day of the first month that follows the end of the quarter.*
Each state also has specific rates and deposit schedules. This article by the Small Business Administration has links to each of the state unemployment insurance tax office.
California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico also require that employers pay for temporary disability insurance.
Cpp Contribution Rate And Maximum
As a result of Canada Pension Plan enhancements the CPP contribution rates for employers and employees is 5.45% starting on January 1, 2021. For more information about the Canada Pension Plan enhancement go to Canada Pension Plan Enhancement.
You have to deduct CPP contributions from your employees pensionable earnings. As an employer, you must contribute an amount equal to the CPP contributions that you deduct from your employes remuneration.
Each year, we determine all of the following:
- the maximum pensionable earnings from which you deduct CPP
- the years basic exemption, which is a base amount from which you do not deduct CPP contributions
- the rate you use to calculate the amount of CPP contributions to deduct from your employees remuneration
Different rates apply for employees working in Quebec. See Employment in Quebec.
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Before You Begin Processing Payroll
As you hire employees, you as the employer have forms to complete. Each new employee must have new hire forms signed and placed in a specific file. The most important form is the employee’s W-4 form for withholding federal income taxes
To help you set up payroll, here’s a checklist of tasks that must be completed and decisions that must be made about how you will pay employees.
What Are Payroll Tax Obligations
Any business with employees must withhold payroll taxes from employees’ paychecks and pay applicable federal, state, and local taxes. The taxes usually withheld from employee paychecks include FICA and federal, state, and local income taxes, if applicable.
Other withholding obligations include FUTA and, in states such as California, Hawaii, New Jersey, New York, and Rhode Island, disability insurance taxes. Failure to pay taxes or missing a payment may result in heavy fines and penalties, so it is important to calculate the amount of payroll taxes owed and to pay them on time.
If the small-business owner does not have outside employees but is incorporated, the above rules apply for the owner’s paychecks as well, because they are essentially the sole employee of the corporation. If the business is not incorporated and there are no employees, the owner will need to pay estimated taxes on self-employment income each quarter.
There are three steps to calculating payroll taxes:
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Remitting Payroll Deductions To The Cra
Did you know that every employer, whether you are the sole employee or you employ hundreds of workers in your company, is required to remit monthly payroll deductions? These payroll deductions are made to the Canada Revenue Agency . These remittances include the employer and employee portion of CPP and EI as well as income tax withheld on behalf of your employee. IMPORTANT: These remittances are due on the 15th of each month Make sure you mark the appropriate date on your calendar!
If you are unsure how much to remit, the CRA has provided an online calculator to assist you with your calculations. Follow the instructions for each employee on this page. You will need to know:
- How much the employee is being paid
- The date and frequency of payment
- How much CPP and EI has already been submitted within the year for each employee
Once you know how much to remit, you can make your payment in a variety of ways. The easiest way to pay is online at the CRA website. You will need your payroll account number. Select Start My Payment, then select Payroll source deductions. You can also make a payment at any major financial institution or through your online banking account. If this is your first time making payroll remittances, you may need to register for a payroll account number. If you are an individual that is self-employed, you can register online here. If you are incorporated, you will need to fill out form RC1B Payroll Deductions Program Account Information.
Create And Print Your Tax Payment
For Federal tax payments, you can record the payment in QuickBooks. Youll send the payment electronically through the IRS web site.
For state tax payments, you can create and print the check to send to the state agencies.
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Getting Complicated Just Wait
If your business is new, you wont have a lookback period, so youll make monthly payroll tax deposits during your first year. Your payment to the IRS is due by the 15th day of the following month. For example, payroll taxes that you withhold in September are due to the IRS by October 15th. As we mentioned above, depending on the tax obligation of your business, your payments can change to another deposit frequency the following year.
Your deposit schedule is dependent on whether you file Form 941 for reconciling tax payments quarterly or Form 944 for reconciling yearly tax payment. Keep in mind that the schedule for your deposit can change, so its important to check your status each year.
If you are a semi-weekly depositor and your payday falls on Wednesday, Thursday or Friday, you must deposit your taxes by the following Wednesday. If payday falls on Saturday, Sunday, Monday or Tuesday, your taxes are due the following Friday.
Regardless of timing, the IRS requires every business to make payroll tax payments either by electronic funds transfer using EFTPS, your CPA or bookkeeper, or a payroll tax filing service.
Appendix 2 Calculation Of Cpp Contributions
You can use this calculation to determine the CPP contributions you should deduct for your employee for a single pay period. To determine the CPP contributions for multiple pay periods, or to verify the annual contribution at years end, use Appendix 3.
Before using this calculation, read Starting and stopping CPP deductions.
Step 1 Calculate the employees pensionable earnings for the pay period.
Enter the employees gross pay for the period…………………………………………………………………… $ 1
Enter any taxable benefits and allowances for the period……………………………………………………. $ 2
Line 1 plus line 2…………………………………………………………………………………………………………… $ 3
Enter any income from Employment, benefits, and payments from which you do not deductCPP contributions, described in Chapter 2 of this guide……………………………………………………… $ 4
Pensionable earnings …………………………………………………………………….. $ 5
Step 2 Enter the basic exemption for the pay period. Use the table below, or the following equation:
Annual basic exemption divided by the number of pay periods in the year.. $ 6
Step 3 Line 5 minus line 6…………………………………………………………………………………………… $ 7
For more information, go to E-services for Businesses.
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