What Are The Required Payroll Deductions In Ontario?
One of the most dreaded words when talking about your paycheck is deductions. Unfortunately, we all have to pay them. However, understanding what is being deducted and why can leave everyone with a little more peace of mind as to where their money is going. There are 3 types of mandatory payroll deductions in Ontario, as well as 3 optional deductions employers can choose to include. Let’s take a look at each one.
1. Income Tax Payroll Deductions
As everyone knows, income tax is legally unavoidable as every employer is required to deduct income tax from each employee’s payroll. The amount deducted in Ontario is based on the employees overall income. Typically, the income to deduction percentages are as follows:
If income = $1 - $40,922
You would pay 15% in federal tax + 5.05% in provincial tax
If income = $40,923 - $44,701
You would pay 15% federal tax + 5.05% on the first $40,922 + 9.15% on every dollar after $40,922 in provincial tax.
If income = $44,702 - $81,847
You would pay $6,705 + 22% on every dollar after $44,700 in federal tax + 5.05% on the first $40,922 + 9.15% on every dollar after $40,922 in provincial tax.
If income = $81,848 - $89,401
You would pay $6,705 + 22% on every dollar after $44,700 in federal tax + 5.05% on the first $40,922 + 9.15% on the next $37,146 + 11.6% on every dollar after $81,848 in provincial tax.
If income = $89,402 - $138,586
You would pay $16,539 + 26% on every dollar after $89,401 in federal tax + 5.05% on the first $40,922 + 9.15% on the next $37,146 + 11.6% on every dollar after $81,848 in provincial tax.
If income = $138,587 - $149,999 =
You would pay $29,327 + 29% on every dollar after $138,586 in federal tax + 5.05% on the first $40,922 + 9.15% on the next $37,146 + 11.6% on every dollar after $81,848 in provincial tax.
If income = $150,000 - $220,000
You would pay $29,327 + 29% on every dollar after $138,586 + 5.05% on the first $40,922 + 9.15% on the next $37,146 + 11.6% on the next $11,412 + 12.6% on every dollar after $149,999 in provincial tax.
For example, if you made $52,000 annually, you would pay approximately $11,391.13 in income tax total including the federal and provincial taxes as outlined below.
Federal taxes = $6,705.15 (base federal tax amount) + $1,605.78 (which is the additional 22% on every dollar after $44,701) = total federal tax of $8,310.93.
Provincial taxes = $2,066.56 (5.05% on the first $40,922) + $1,013.64 (which is 9.15% on every dollar after $40,922) = total provincial tax of $3,080.20.
The Exception To The Formula
If employers are collecting their employee income tax deductions correctly as outlined above, when it comes to income tax season, and filing your personal income tax return as an employee, you should not technically owe anything or receive any reimbursement after filing unless you have contributed to your RRSP's, if you have made large charitable donations, or are in arrears for any tax owing from prior years. However the exception that is often overlooked is when a person works multiple part-time jobs which pay less per job, per year than the $11,474 that the government deems your basic personal amount which is not taxed. Because of that, the employers would not have deducted any income tax throughout the year on behalf of the employee making less than $11,474 per year on their payroll. However, at the end of the year, the employee is still responsible for paying taxes on their overall annual income amount, which typically exceeds the basic personal amount as a whole. For example, if a person works three part-time jobs, making $7,500 per job over the course of the entire year. That means that each of their employers would have paid the employee $7,500 each without deducting any federal or provincial taxes. In turn, that means that the employee actually made $22,500 for that year and at tax time, that employee will owe tax on the total $22,500 because the amount is over the $11,474 basic personal amount.
2. Employment Insurance (EI) Payroll Deductions
What is employment insurance? In the event that you are laid off or without employment, assuming you did not leave your employment by choice, you will be covered with financial compensation via Employment Insurance, also known as EI. This deduction is taken from your income on each paycheck in order to protect you financially down the line, should any unforeseen circumstances arise. The federal government states that the maximum EI to be deducted from employees is 1.88%. However, it is also required that employers in Ontario also pay into EI for each employee, contributing 1.4% of the total amount of the 1.88% that the employee paid in addition to what was deducted from the employee's paycheck, which becomes an expense to the employer. Employment insurance has proven to help thousands of Canadians in times of income loss, giving them up to 45 weeks of financial assistance.
3. Canada Pension Plan (CPP) Payroll Deductions
At some point, we all retire from the work world. When that time comes, we get to cash in on the money we’ve stashed away in our Canada Pension Plan, or CPP. Basically, CPP is a contributory, earnings-related social insurance program that takes payroll deductions from Ontario workers starting at age 18. Once retired, the Ontario government will award you with a monthly amount of money, to subsidize your loss of income. In terms of how CPP is deducted from your paycheck each week, as the employee, 4.5% is deducted from your earnings, and the employer, matches that contribution dollar for dollar.
Some employers have the option of adding additional deductions to a payroll agreement. Deductions such as a personal pension, which is an additional pension plan through your employer, in addition to deductions for a group insurance plan, which covers life insurance, disability, health insurance and long-term care, as well as an RRSP savings plan. These are all optional deductions that can be added to the mandatory deductions mentioned above. While these deductions can be frustrating to lose from each work week, the potential to help you financially in the future should be appreciated.
If you have any questions or concerns regarding any payroll deductions as an employee or if you have questions as an employer to make sure you are correctly collecting and remitting the mandatory payroll deductions from your employees, don’t hesitate to give us a call. Our incredible team at Cal Accounting prides itself on helping you understand your finances while making sure your money is safely accounted for.