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In any payroll, there is always a certain portion paid out toward an employee’s income, such as regular wages, and a certain portion that is deducted from an employee’s income — aka payroll deductions. Knowing what these are will make sure you’re remaining compliant each pay run and your employees are paid accurately.
What are payroll deductions?
Deductions on a pay cheque is a fancy way of describing the amount that an employee pays to cover employment expenses — mandatory and otherwise. Not all payroll deductions are made the same, meaning there are different ways to calculate them and different scenarios where they apply.
How do payroll deductions work?
Whether you handle your payroll manually or use a payroll software, payroll deductions are typically processed each pay period. Deductions are a certain amount of money from or percentage of the employee’s pay that’s then filed and paid to the Canada Revenue Agency (CRA) or other agencies for various purposes.
The amount subtracted from the employee pay depends on a number of things, such as the individual’s TD1 Personal Tax Credits Return form, provincial or territorial regulations, other applicable tax laws and withholding information provided by either the employee or a court order.
Common types of payroll deductions.
Keep in mind, this isn’t an exhaustive list of Canada’s payroll deductions, but here are a few to keep in mind as you’re working with payroll.
Statutory deductions
Statutory deductions are ones that are required to be subtracted from an employee’s pay cheque. There are three big ones.
Income Tax – Income tax refers to the federal and provincial taxation on the money an employee earns. Income itself can wear a number of different hats: employment income, investment income, commission income and retirement income. The tax system works on a graduated or progressive basis. In other words, when someone earns more money, they pay more in taxes.
On top of the federal taxation, each province and territory has its own tax rate. Knowing which applies to your employee depends on their province or territory of employment rather than where they live. When unsure, the CRA can give a proper ruling to determine which province or territory to use.
The rates for these taxes are set by the Canadian government and updated biannually. The calculations are referred to as tax tables.
Employment Insurance – Canada’s employment insurance deductions go toward supporting unemployed individuals while they look for work or upgrade their skills, as well as caregiver benefits, maternity leave and sick benefits. Unless an employee is exempt, this is deducted from each pay cheque.
Canadian Pension Plan (CPP) – Commonly referred to as CPP, Canadian Pension Plan deductions are another mandatory payroll deduction, unless the employee is exempt. This deduction is collected over time for when an individual retires. This monthly, taxable benefit replaces a portion of their income when they retire and continues for the rest of their life.
Note: Québec uses the Québec Pension Plan (QPP) rather than CPP.
Health insurance
Health insurance – Medical, dental and/or vision health premiums are voluntary deductions. Since this is voluntary, the employee must opt into any workplace health insurance coverage to have it deducted from their pay cheque. These can be spread out over the course of employment and deducted with each payroll or deducted once a month.
Short-term & long-term disability – If you provide your employees with short-term & long-term disability coverage, it ensures that your employees still receive a percentage of their salary or wages in the event of an accident that leaves them unable to work, either temporarily or permanently. This deduction type would be used to collect employee premiums towards this insurance.
Life insurance policies
Life insurance – This deduction is used if an employer provides life insurance coverage, and your employees have signed up to receive basic term life insurance protection through the workplace. The premiums associated with the coverage are deducted from an employee’s pay, unless the employer is paying the premiums on behalf of the employee.
Supplemental life insurance – Typically, company-sponsored life insurance plans tend to be pretty basic, one-size-fits-all type of plans. As such, your employees might want to get some additional life insurance coverage. If this supplemental insurance coverage is being purchased through the workplace, your employee gets the benefit of better rates (it’s not always guaranteed though), and this deduction type would be used to collect the premiums associated with this insurance.
Dependent life insurance – This type of insurance coverage protects you in the case of a financial loss that results from the loss of a dependent spouse or child. If your employee is paying for this additional coverage, you can use this deduction type to deduct the premiums directly from an employee’s payroll.
Accidental Death & Dismemberment (AD&D) – Based on the type of accidents that are covered in the plan, AD&D insurance gives your employees additional protection in the case of an accidental injury or death. The premiums for this type of coverage can be based on your salary or a specific set amount.
Garnishments
Garnishments – Otherwise known as Wage Garnishments, garnishments are a deduction type that is used if an employee is required to pay a debt as a result of a court order. The garnishment is deducted directly from an employee’s pay cheque until the entire debt is paid off or alternative arrangements to pay the debt have been made by the employee.
Retirement
Registered Retirement Savings Plan (RRSP) – If your employees want to put aside some money for their retirement, they can do that through a Registered Retirement Savings Plan, commonly referred to as an RRSP. This deduction type would be used to manage employee contributions if the amounts are being deducted directly from their payroll.
Registered Pension Plans (RPP) – This is another option for employees to put aside money for their retirement. Arranged by an employer or a union, a Registered Pension Plan provides a pension to employees via periodic payments. Both the employer and employee contribute to these plans.
Other withholdings
Profit-sharing – This type of plan works as an excellent incentive to motivate and retain employees because it gives them a chance to really participate in the company’s financial success. Profit-sharing plans didn’t always include a component of employee contribution; however, this is becoming more commonplace. Employees have certain limits to the amount they can contribute towards a profit-sharing plan.
Union fringe deductions – These are taxable health benefits that are deducted from a union employee’s check.
Union dues – If your unionized employees are required to pay dues for their membership in the union, you would use this deduction type to hold back the membership fees from their payroll.
How to calculate deductions.
As nice as it would be to have one formula that rules them all to calculate payroll deductions, that’s not the case. How a deduction is calculated depends on a number of variables, such as the province or territory, the kind of deduction and so on.
To determine how to calculate a specific deduction, it’s best to look up the guidelines for the deduction you’re interested in, as well as the guidelines for the province or territory in question.
Disclaimer: The content we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals and should not be taken as legislative advice.
