Considering expanding your small business to include employees? Here’s what you need to know about Source Deductions!
What are Source Deductions?
It is the income tax, CPP (Canada Pension Plan) and EI (Employment Insurance) deducted from the employee’s paycheque, as well as the Employer’s portion of CPP and EI that is due to CRA. This applies to all employees whether they are part-time or full-time. Employees under 18 do not have to pay CPP.
Can I avoid paying Source Deductions by just hiring casual labourers as subcontractors?
Yes, if you only need a worker for a short term job or on a casual on-call basis you can pay them as a subcontractor. The subcontractor should provide you with a written invoice for their hours that you can pay with cheque. You claim this as a business expense and you are not responsible for any Source Deductions. The subcontractor is responsible for reporting this income on their tax return. However, if you are employing someone on a regular basis, even if it is part-time, you will need to register a payroll account with CRA and have your payroll and source deductions prepared by a bookkeeper or accountant.
How do I open a payroll account?
Your payroll account must be registered before you hire any employees. The number will be your 9 digit business number with RP0001 at the end, for example, 98765 4321 RP0001. Click here for info on the CRA website regarding setting up a payroll account.
How are Source Deductions calculated?
Generally, you don’t need to worry about this because your payroll preparer will be using software such as Quickbooks or Simply Accounting that will calculate the deductions. Let’s look at an example!
Gross wages $1000 Less Employee deductions: Tax $90.53, CPP $42.84, EI $18.80 (Total 152.17) Net pay $847.83
Now, the employer is required to contribute a matching amount of CPP and 1.4 times the EI.
Employer CPP $42.84, EI $26.32
Add these amounts to the deductions already taken from the Employee and the total is 221.33 Source Deductions owing.
How do I pay the Source Deductions?
You must pay the Source Deductions every month by the 15th of the next month. This is very important because the CRA will charge outrageous penalties and interest even if your payment is just a few days late! Your payroll preparer will file the remittance (called a PD7A form) and you will just need to bring a cheque into your bank quoting your payroll account number in the memo. Contact Alicia at Coastal Tax at firstname.lastname@example.org if you have any questions regarding setting up payroll for your small business!
– Alicia Loewen, Coastal Tax