Do you run your own business? Are you looking to hire more employees in 2021? Being an employer has many aspects. You should know that the Canada Revenue Agency (CRA) requires small businesses to adhere to several rules when hiring people.
Employers are required to complete a lot of paperwork before recruiting employees. They need to open a Payroll Deductions account with the CRA, for which you require a business number (BN). They also need to obtain new employees’ information such as social insurance number (SIN) as well as a completed Personal Tax Credits Return, or TD1 form.
Below, we will review key steps every employer needs to take when hiring a new employee to ensure they are in compliance with all tax obligations with respect to payroll.
Obtain all Necessary Employee information
It is always a good idea to examine an employee’s SIN to ensure that it does not start with ‘9’. People whose SIN starts with ‘9’ are not permanent residents of Canada. They most often are permitted to work in the country only for a particular period of time and only for a specific employer, depending on the type of visa they have from Immigration, Refugees, and Citizenship Canada.
Further, you should ask the new employee to complete Form TD1 to calculate the amount of tax that needs to be deducted from his/her employment income.
Prepare a Payroll
Once you have committed to hire a new employee, you need to prepare his/her payroll which will include any taxable benefits they will receive as part of their employment. These benefits can range from boarding and lodging, access to company car, a low-interest loan, among others. These benefits need to be added to an employee’s cash salary to determine their total taxable income.
Arrange for Payroll Deductions
You need to make arrangements for payroll deductions such as contributions to the employee’s Canada Pension Plan (CPP), Employment Insurance (EI) premiums and income tax from the employee’s total salary. You also need to make employer contributions towards CPP and EI from your pocket. Further, you are required to submit the deducted amount as well as your contribution to the CRA.
Let us discuss these deductions in detail:
Contributions to the Canada Pension Plan (CPP)
The Canadian government’s aim behind the CPP program is to make people save for their retirement from the day they join work. For 2021, you are required to deduct CPP from any employee’s salary above $3,500, and up to $61,600. After reaching the maximum salary threshold for the year, CPP deductions should cease.
For 2021, employees’ CPP contribution rate is 5.45%, up from 5.25% in 2020. Let’s understand this rate change with an example. Suppose you have two employees – Kevin and Sarah. You have kept their salaries unchanged in 2021 as some of your large clients have delayed their contract due to the COVID-19 pandemic.
Kevin earned $63,000 in 2020. His salary is more than the maximum pensionable earnings of $58,700 in 2020 and $61,600 in 2021. You deducted $2,898 in CPP contribution (5.25% of $55,200) in 2020, and $3,166 (5.45% of $58,100) in 2021. Even with Kevin’s salary remaining unchanged, you will deduct an additional $268 in 2021, or $22.33 per month, towards CPP contribution.
Now, let’s take the case of Sarah. Her salary also remained unchanged at $50,000 in 2020 and 2021. In 2020, you deducted 5.25% on $46,500 ($50,000-$3,500), which comes to $2,441. In 2021, you will deduct 5.45% on $46,500 that amounts to $2,534. Here, you will deduct an additional $93 in 2021, or $7.75 per month, towards CPP contribution.
In addition to remitting the amounts deducted from the employee’s salary, employers are also required to pay an equal amount to the CRA as employer’s contribution. In both examples, we can see that your contribution towards CPP will increase as a result of the rise in the contribution rate and maximum pensionable earnings. This is despite the salary of both the employees remaining the same. As your organization only has Kevin and Sarah, your 2021 contribution towards CPP as an employer will rise by $361, or $30.1 per month.
Note that you can deduct CPP contributions for any employee between the ages of 18 and 69 who is not currently receiving a pension under Quebec Pension Plan or CPP. However, some employees can choose to opt out of participating in the CPP program under special circumstances.
Employment Insurance (EI) Premiums
Most employees in Ontario are required to pay EI premiums so that the government can support them financially during periods of unemployment. For 2021, the Canada Employment Insurance Commission (CEIC) has kept the EI premium rate unchanged at 1.58% for employees and 2.21% for employers due to the pandemic. But it has increased the maximum insurable earnings to $56,300 from $54,200 in 2020. Hence, the maximum annual EI contribution will increase by $33.18 to $889.54 for employees, while for employers it will rise by $46.46 to $1,245.36 per employee. This change will increase your EI contribution by $92.92 ($46.46*2).
However, you can contribute a lower amount if you offer a short-term disability plan to your employees. EI premiums can be deducted up to any age, unlike CPP. You can stop an employee’s EI deductions once you reach the maximum annual deduction.
You will need to check the provincial or territorial income tax rates for each province and territory where the employee works to calculate the amount of tax payable for that employee. The following tables show the federal and provincial tax rates for 2020 and 2021 taxable income:
COMBINED FEDERAL & ONTARIO TAX RATES FOR 2020 & 2021
You need to submit your contribution and the amounts deducted for CPP contributions, EI premiums, and income tax to the CRA.
At Sloan Partners LLP, our financial professionals will help you determine your payroll obligations to ensure you remain in compliance with all provincial and federal requirements. Contact us online or by telephone at 416-665-7735.