It’s important to understand how payroll tax works. It’ll help you make sense of exactly what you’re taking home and provide a better understanding for budgeting when it comes to buying your first home or saving for that long-awaited trip. Afterall you’d hate to fall short of your financial obligations because you simply didn’t know.
Payroll tax is a tax that is deducted from your paycheque and can be found on your pay stub. The major deductions include income tax and two government services, Employment Insurance (EI) and Canada Pension Plan (CPP). These deductions mean the amount of your paycheque will be less than the total you earned. However, you do get credit for having paid these amounts, which will be reported on your T4 when you file your taxes.
To put it simply, income tax is a tax you pay based on the amount of money you earn and is broken up into two parts federal and provincial/territorial. Taxes are paid at graduated rate, meaning the more you make the higher your tax rate is. Tax brackets are determined based on your level of income and are updated yearly.
Employment Insurance provides Canadians with temporary income when you lose your job through no fault of your own and are looking for work, upgrading skill sets or temporarily laid off. Your EI is calculated by your employer and there is no age limit for deductions. Yearly EI premium rates and maximums are posted through Canada Revenue Agency.
Canadian Pension Plan
Canadian Pension Plan is designed to help provide Canadians with income when they retire and provides a benefit if they become disabled. CPP is required for all employees between age 18-65. CPP deductions will stop once you have reached the maximum employee contribution (you’ll notice your net pay a little higher if this happens) for the year. You can find out more about the contribution rates, maximums, and exemptions through Canada Revenue Agency.
To get a better understanding of what your deductions will be on your current salary, a wage increase or maybe a new position, try one of the many online payroll calculators. Understanding these deductions will put you in a better place to plan for the future, but we’re still here when you need us. Our expert Advisors are ready to guide you through all the changes life can offer.