Payroll Taxes: What They Are and How They Work

What are payroll taxes?

Payroll taxes are mandatory amounts deducted from an employee’s wage, along with contributions employers must make to fund key government programs, such as pensions, employment insurance, and public services.

In Canada, these deductions include:

• Canada Pension Plan (CPP) payroll deductions. CPP contributions are split between employee and employer.
• Employment Insurance (EI) deductions and premiums. Both employees and employers contribute to EI.
• Federal income tax and provincial/territorial income tax. Income taxes are withheld from each paycheque and sent directly to the CRA.

Payroll taxes vs. income taxes—what’s the difference?

Payroll taxes are deducted at the source from an employee’s pay and remitted by the employer. These include CPP, EI, and income tax withholdings. In contrast, corporate income taxes are what a business itself pays on profits, usually through a T2 income tax return.

Think of it this way: Payroll taxes are withdrawn from every paycheque, while corporate income tax can be remitted annually when the business files its return, or monthly or quarterly if the business is making instalments.

Why is compliance important?

For incorporated businesses, understanding how payroll taxes work is not optional—it’s essential. The CRA requires timely CRA payroll source deductions and filings, and missing deadlines can lead to interest charges, penalties, or future audits.

Compliance ensures employees are credited for their CPP contributions and EI company contributions, and protects businesses from costly mistakes.

What exactly is deducted from your employees’ paycheques?

Here’s what shows up on most Canadian pay stubs:

• CPP deductions
• EI deductions
• Federal Income Tax
• Provincial Income Tax

Read on for more information on CPP and EI:

CPP contributions

CPP provides retirement, disability, and survivor benefits. Both employees and employers contribute a percentage of pensionable earnings up to a yearly maximum.

EI deductions

EI helps workers who lose their jobs, are on parental leave, or face illness. Employees pay a set percentage of insurable earnings, while employers contribute 1.4 times that amount.

4 CRA accounts you need to know about

Incorporated businesses deal with 4 main accounts with the CRA:

1. T2 income tax return. This is submitted for corporate income tax.
2. Payroll remittances. These are regular filings, including the T4 summary and T4 slips for employees.
3. T5s. These slips report interest, dividends, or investment income.
4. Goods and Services Tax (GST)/Harmonized Sales Tax (HST). GST/HST is paid by businesses with more than $30,000 in taxable sales over 4 consecutive calendar quarters.

What about provincial payroll taxes?

On top of federal rules, some provinces (like Quebec, Manitoba, and Newfoundland and Labrador) impose additional payroll taxes in Canada.

These provinces require employers to pay extra contributions, usually to support healthcare or education. Employers need to check their province’s requirements carefully.

Step-by-step: How payroll works for incorporated employers

If you have an incorporated business and hire employees, here’s what you need to do to pay your staff.

1. Register with the CRA for a payroll account.
2. Set up payroll deductions including CPP contributions, EI premiums, and income tax withholdings.
3. Withhold deductions each pay period from employees’ gross pay.
4. Add company contributions (your share of CPP and EI).
5. Remit payroll taxes to the CRA according to the required schedule.
6. File year-end reports, including T4 slips, T4 summary, and other forms as needed.

Here are other important tasks and factors to consider:

Record keeping and reporting

Employers must keep detailed payroll records, including:

• Gross and net pay
• Payroll deductions
• Company contributions
• T4 summaries and slips

Records must be kept for at least 6 years in case of a CRA audit.

Frequency and penalties

You’ll likely remit your payroll taxes monthly, quarterly, or more frequently, depending on payroll size. Payments can be made online, by pre-authorized debit, or through your financial institution.

If you miss a deadline, you may have to pay interest and penalties. So be sure to contact the CRA ahead of time to discuss your options.

The big picture: Why payroll taxes matter

Understanding how payroll taxes work may seem intimidating, but it’s really about fairness: ensuring employees contribute to and benefit from Canada’s safety net, and that businesses stay compliant with the CRA.

Those payroll deductions also fund benefits that employees will use throughout their lives. CPP ensures retirement income security, while EI provides support during life transitions and income tax helps fund healthcare, infrastructure, and public programs.

Have questions? TurboTax can help with your return as well as offer expert year-round help with your corporate GST/HST questions and returns, and other bookkeeping and payroll help.

Whether you’re receiving your first pay stub or managing your company’s first payroll, knowing how payroll taxes work keeps you on solid ground.

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