Payroll Accounting

Paying employees involves gross earnings, several compulsory and voluntary deductions, and remittance to the CRA — with the employer paying its own matching share of CPP and EI on top.

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Key things to remember

1Gross Earnings − Deductions = Net Earnings.
2Compulsory deductions: income tax, CPP, EI. Voluntary deductions: union dues, RPP contributions, etc.
3TD1 Form claims non-refundable tax credits; T1 Form is the annual personal income tax return.
4The employer pays its own matching share of CPP (dollar-for-dollar) and EI (about 1.4× the employee's share) — and these rates change yearly.
5Form PD7A is the official remittance form sending all withheld and matched amounts to the CRA.

Payroll is a list of employees and the amount of money to be paid to each of them — but behind that simple definition sits one of the most heavily regulated parts of small business accounting, because payroll touches the CRA (Canada Revenue Agency), Service Canada, and the employee's own take-home pay all at once.

Term	Definition
Gross Earnings	The total earnings of an employee before deductions
Deductions	Amounts subtracted from an employee's gross earnings
Taxable Earnings	The earnings that remain after non-taxable deductions; used to determine the amount of income tax deducted
Net Earnings	The balance remaining after deductions have been subtracted from gross earnings — the employee's actual take-home pay

From Gross Earnings to Net Earnings

Compulsory vs. voluntary deductions

ACompulsory Payroll Deductions

Required by law — the employer has no choice
Include income tax, Canada Pension Plan (CPP), and Employment Insurance (EI)
Both the employee AND the employer contribute to CPP and EI
Remitted to the CRA using Form PD7A

BVoluntary Payroll Deductions

Made from gross earnings by the employer at the request of the employee
Examples: union dues, extra health/life insurance premiums, charitable donations
A Registered Pension Plan (a private pension plan registered with the federal government) is a common voluntary deduction
Contributions to an RPP are tax deductible for the employee

Every employee fills out a TD1 Form — a form showing an employee's claim for non-refundable Tax Credits (amounts of income on which income tax is not paid). There are separate federal and provincial TD1 forms, and each must be completed whenever an employee's credits change (for example, after having a child). Each spring, individuals file a T1 Form — the income tax return completed each year by taxpayers — to settle up their actual tax owing against what was deducted from every paycheque all year.

Fig 1From gross earnings, through compulsory and voluntary deductions, to net earnings and the employer's own remittance

CPP and EI rates change every year

Employee CPP and EI contribution rates are set by the federal government and reviewed annually, so a specific percentage learned this year will very likely be slightly different next year. As of the mid-2020s, the employee CPP rate has been roughly 5.95% and the employee EI rate roughly 1.6%, but always use the CURRENT rates (and the small annual CPP basic exemption) for real payroll work — never treat a memorized rate as permanent.

The employer does not get to keep the CPP and EI withheld from an employee's pay, and the employer also owes its OWN matching share on top. The employer's share of CPP normally equals the employee's contribution dollar-for-dollar; the employer's share of EI is set at about 1.4 times the employee's contribution. All of it — employee and employer portions of CPP and EI, plus income tax withheld — is reported and sent to the CRA together using Form PD7A, the official remittance form for payroll deductions.

Pay methods: salary, commission, and piece rate

Commission is a method of payment to workers based on a percentage of the sales they make.
Piece Rate is a method of payment that is based on the number of units a worker produces.
A Statement of Earnings and Deductions must be given to every employee, showing how their net earnings were determined for that pay period.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1

An employee earns $1,000 gross for the week. Income tax withheld is $150. Using illustrative rates of 5.95% for employee CPP and 1.64% for employee EI (always confirm current rates before using real numbers), find total deductions and Net Earnings.

Example 2

Using the same employee, find the employer's own CPP and EI contribution, and the total amount that must be remitted to the CRA on Form PD7A for this one employee's pay.

Example 3

A salesperson earns a $400 base salary plus 6% commission on $18,000 of sales for the week. Find Gross Earnings. Separately, a factory worker paid piece rate at $2.50 per unit assembles 340 units in a week. Find that worker's Gross Earnings.

Where marks get lost

Treating a memorized CPP or EI percentage as a permanent fact — the CRA/Service Canada adjusts these rates almost every year.
Forgetting the employer owes its OWN matching CPP and EI, on top of what was withheld from the employee — payroll cost to the employer is always more than gross pay alone.
Confusing the TD1 (claims tax credits, used to calculate deductions all year) with the T1 (the annual return filed the following spring to settle actual tax owing).
Calculating commission on the salesperson's take-home pay instead of on the dollar value of sales made.
Mixing up gross earnings and taxable earnings — taxable earnings are what's left after NON-TAXABLE deductions, and that (not gross pay) is the base used to calculate income tax withheld.

Flashcards 10

Payroll

Gross Earnings

Net Earnings

Taxable Earnings

+ 6 more

Practice

What term describes an employee's total earnings before any deductions?

Which of these is a COMPULSORY payroll deduction in Canada?

Which form does an employee complete to claim non-refundable tax credits?

The employer's share of an employee's EI contribution is approximately:

A worker is paid $3.00 per unit and assembles 275 units in a week. Find Gross Earnings.

A salesperson earns 8% commission on $12,500 of sales, with no base salary. Find Gross Earnings.

Which form does a business use to remit payroll deductions to the CRA?

Why must CPP and EI rates be looked up each year rather than memorized permanently?

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