Hello, my name is Anne Mathew and I
will be your presenter today. The purpose of
this presentation is to help employers understand when
and how to use the bonus method to
calculate income tax from certain types of payments.
In particular, we will look at vacation pay,
overtime payments, lump sum payments and bonuses, and
how to calculate and withhold income tax under
these circumstances. We will
also discuss how to register for your payroll
account, and how to remit amounts to the
CRA. This is the third presentation in a
series of four. The previous presentations will soon
be available on CRA's website. In our last
presentation - 'How payroll works', we introduced the
payroll cycle. As you can see, the employer
has to calculate the gross pay of an
employee,
and then figure out the amounts to withhold,
which are - the Canada Pension Plan contributions,
Employment Insurance premiums and income tax, so they
can calculate the employee's net pay. Today, we
will build on the last presentation by showing
you different ways for calculating source deductions depending
on the type of payment you make to
your employees. We will briefly touch on the
more common methods
used when an employer pays salary or wages,
vacation pay and overtime pay to an employee.
We will talk about when and how to
use either a lump sum withholding rate or
the bonus method. And we will also discuss
how to remit your source deductions to the
CRA, which means that you will need to
register for a payroll account. We'll show you
how to do both of these things today.
We will also briefly touch on penalties. As
an employer or payer, you are responsible for
deducting income tax from the salary, wages or
other income you pay to your employee. There
are a number of different methods for calculating
the amount of income tax to deduct from
your employee's pay. The one that you use
depends on the type and frequency of the
payment, and the
employee's TD1 claim code. In the last webinar
we showed you how to calculate deductions using
the Payroll Deductions Online Calculator PDOC for short
and we talked about the payroll tables for
withholding payroll deductions. We discussed when to use
the regular method and manual method for income
tax calculations. Just to recap. Pay period basis
or regular
method is used when you make regular payments
to your employee such as salary, wages, commissions,
overtime pay, taxable benefits and allowances, pension, etc.
The manual method is used when the employee's
personal tax credits on their TD1 are more
than $29,424.01. As of this year, you can
use
PDOC to calculate how much income tax to
deduct. The bonus method and lump-sum rates seem
to cause the most confusion. Today, let's look
at these a little closer. In addition to
the regular types of payments such as salary,
wages, etc., employers may pay employees other types
of payments. What if, you pay your employee
a bonus,
a retroactive pay, or other types of irregular
payments. If you would simply add the irregular
payment to the employee's salary, the employee would
have too much tax taken from his or
her paycheck. To understand which method to use,
let's talk about when and why we use
the bonus method to calculate tax. The bonus
method of calculating income tax is used when
the
payment to your employee is a bonus, a
retroactive pay, or an 'out of the ordinary'
or an atypical payment and if added to
the employee's regular pay, in a pay period,
it would result in excess tax deductions at
source. Why do we use this bonus method?
We use this method to calculate the amount
of income tax to deduct from 'out of
the
ordinary payments' because this method will result in
a tax deduction that better approximates the amount
of tax the individual will owe on the
employment income when filing his or her personal
income tax return. Therefore, using the bonus method,
results in a fairer tax deduction because the
payment is spread over the year and taxed
accordingly. Let's look at a visual example of
how to calculate the amount of tax to
deduct from bonus. Anyone using their own payroll
program will not have to do this manual
calculation but it is still nice to know
how the tax is calculated. Remember Mary from
our previous webinar? We bring her back in
this webinar and on the screen. As you
know, she earns a gross pay of
$500 at the end of each week. Remember
that Mary is a 16 year-old and is
exempt from making CPP contributions. In addition to
her wages, Mary is eligible to receive a
bonus of up to 10% of her gross
pay. She exceeds your expectations and in October,
you give her a bonus of $2,600. Her
province of employment is
Ontario. The claim code on her TD1 federal
and provincial forms is 1 . We will
show you how income tax is calculated on
this ?bonus' that Mary received in addition to
her weekly pay of $500. This is for
illustration purposes only. We do not recommend this
method because if we were to simply add
the $2,600 to Mary's $500
regular pay and calculate the income tax using
the regular method on the total of $3,100,
the amount of income tax deducted would be
$1,036.73. The net amount Mary would receive in
this pay period would be $2,004.99. To determine
how much income tax to deduct
from bonuses or retroactive pay increases, take the
total remuneration for the year including the bonus
or increase and subtract certain amounts such as
pension contributions union dues and other similar amounts.
For more information on amounts you should subtract,
please go to the CRA website. After subtracting
the required amounts, if the total remuneration
for the year, including the bonuses or increase
, is $5,000 or less, deduct 15% tax
or 10% in Quebec from the bonus or
retroactive pay increase. If the above result is
more than $5000 use the bonus method. The
steps that I'm about to review happen 'behind
the scenes' when you use your PDOC. For
all of you visual people
out there, I thought that it might be
interesting to show you how the calculation actually
works by manually going through an example. This
is a four step process when using the
bonus method to calculate tax deductions. In Step
1 the amount of Mary's bonus payment is
divided by the number of pays she receives
in the year, $2,600/52
gives you $50. In Step 2, for calculation
purposes only, add the $50 to Mary's regular
pay in the pay period to get her
combined bonus and pay amount. You will need
to have this combined amount for the next
step. In step 3, we determine the federal
tax to deduct. Please remember, that this is
a manual calculation.
Using Guide T4032 your Payroll Deductions Tables, find
the federal tax that you deduct on $550
per week. It is $41.25. Now, find the
federal tax that you would deduct on $500
per week. It is $34.55. Subtract one from
the other. The result is the federal tax
you have to deduct on the additional $50
per week which is $6.70. In Step 3,
the provincial tax to deduct, do the same
thing you did for the Federal income tax
calculation in the previous slide, but use the
provincial tables now. Find the provincial tax that
you deduct on $550 per week. It is
$22.15. Subtract the provincial tax that you deduct
on $500 per week $19.90. The result is
the provincial tax you have to deduct on
the additional $50 per week which is $2.25.
This is the final step. Remember we pay
haven't actually deducted any income tax yet. In
this step we do the math to calculate
the income tax to deduct on the $2,600
bonus payment. We know from step 3 that
the additional federal income tax is $6.70 and
the additional provincial income tax is $2.25 per
pay period. Multiply these two amounts by the
number of pay periods that you divided the
bonus by in the
first place. In this case it was 52
because Mary is paid weekly. The total of
these two amounts is $465.40. This is the
income tax that you would deduct from the
bonus. Please note that there is a slight
discrepancy, $20 in this situation, if you were
to use the PDOC. This is because the
payroll tables use a range
of earnings whereas the PDOC is able to
calculate a more exact amount. This is a
good time to mention that, if the employer
pays an additional bonus payment a second time,
follow the same steps except that in Mary's
case her base pay will now be $550.
Having said this, if the employer pays more
often, there may be a point in time
where the employer would just
add the bonus amount to the employee's income
in the pay period and deduct tax on
both instead of using the bonus method. This
slide shows the difference in the amount of
income tax deducted using the regular and bonus
methods. The regular method means that the employer
adds the bonus to the employee's pay to
calculate the income tax to deduct.
Even though Mary in fact will receive $3,100
in the one pay period, if her employer
were to simply add the $2,600 bonus to
her weekly pay and enters this figure into
PDOC, PDOC will assume that Mary makes $3,100
a week, every week and will calculate the
tax deduction as $1,036.73.
However, using the bonus method that we just
reviewed, the income tax deduction on the combined
pay and bonus is only $519.68. As you
can see, using the bonus method is better
for Mary because that is an additional $517.05
in Mary's net pay for this pay period.
The employee's tax liability will be
determined when they file their personal income tax
return. If you used the regular method, the
employee will have paid more income tax than
they will owe on their employment earnings. They
will receive a refund of the extra income
tax. Now neither calculation is wrong, but why
make the employee pay more income tax than
they have to and then wait until they
file their return next year to get a
refund?
Now that we have discussed bonuses, let us
talk about vacation pay. There are some variables
here. Employers pay vacation pay to their employees,
and the employees may take their holidays or,
they can decide not to take their holidays
and cash-in their vacation pay. Bringing back Mary
as an example. Mary decides to take her
holidays this month, and instead of her $500
regular pay, she just gets the same amount
$500 in vacation pay. Income tax calculations are
no different on vacation pay than regular pay.
Therefore, Mary's regular salary continues, she is just
on paid vacation for the week. The deductions
are exactly the same as it would be
if she had worked the week. Let's assume
that at
the end of the year, Mary decides that
she wants to cash out 12 days of
accumulated vacation, which equals to $1,200. This is
in addition to her regular pay of $500.
To calculate income tax on the vacation pay,
the employer must use the ?bonus method'. We
have already discussed how to use the bonus
method. Now this slide shows you the summary
of
Mary's pay and deductions for this pay period.
It is very important that you enter the
vacation pay of $1,200 in the bonus field
of PDOC as you see on this slide,
and not in the vacation field, as we
are using the bonus method to calculate the
paid vacation pay. This will allow the PDOC
to calculate Mary's payroll deductions accurately, and this
results in a fairer calculation of income tax
deducted. Now that the employer has calculated the
amounts they must withhold from the employee's pay,
they can pay the employee the gross amount
minus the amounts they withhold, which is the
net pay. This summarizes Mary's regular pay, paid
out vacation pay, the deductions and net pay.
Overtime Pay.
This is yet another type of payment that
an employer pays its employees. Now, how income
tax is calculated on overtime pay is based
on the question Is overtime being paid in
the same period in which it was worked?
If your answer is yes, then use the
regular method. If your answer is No, use
the bonus method. Now let's look at overtime
with Mary. Mary works some
overtime hours this week and makes $200 in
overtime pay. How would we go about calculating
income tax on that? As you know, the
first question that needs to be asked is
Are the amounts paid in the same period
in which it was worked? If that is
the case, then the overtime pay is added
to Mary's regular pay and the deductions are
calculated using the
total of $500 $200. Therefore, calculate the deductions
on $700 using the regular pay period method
that we have already discussed. If you were
to include the information in PDOC using the
regular method of calculating deductions, this is what
the results would look like. This slide summarizes
the gross pay, the deductions
and net pay for Mary in this pay
period. Looking at Mary's situation again, where Mary
earns $200 in overtime pay, in addition to
her regular pay of $500. Revisit the question
when overtime is paid - let us ask
the question again. Are the overtime amounts paid
in the same period in which it was
worked? We just saw how it is calculated
when your
answer to this question is ?Yes'. We used
the regular method of calculating deductions. What if
your answer is 'No' and the overtime payment
is paid in a later pay period? When
the overtime is paid in a later pay
period, you should treat the overtime pay as
a bonus. Deductions are to be made using
the bonus and retroactive pay increases method. That
brings us back to the bonus
method we already discussed. We know how to
calculate income tax using the bonus method. If
you were to put Mary's information in PDOC,
this is what it would look like. It
is important to note that, in this situation,
the overtime pay is calculated the same way
as a bonus payment, therefore, when you include
the information on PDOC, put the $200
overtime pay in the bonus box. If we
were to add the overtime pay in a
period after in which Mary earns it, this
is what Mary's gross pay, deductions and net
pay would look like. Lump-sum payments are yet
another type of payment that an employer may
pay employees. Retiring allowances or certain payments out
of
registered plans such as Registered Retirement Savings Plans,
Registered Pension Plans, etc. would be considered lump-sum
payments. As an employer, you are more likely
to pay retiring allowances. Many payers think that
anytime they make a one-time payment the taxes
should be withheld using these lump sum rates.
However, the lump sum
tax rates apply to these very specific types
of payments only. Rates are dependent on the
amount of the payment. Therefore, combine all lump-sum
payments that have been or are expected to
be paid in the calendar year when determining
the composite rate to use. Deduct 10% on
amounts up to and
including $5,000 20% on amounts over $5,000 up
to and including $15,000 and 30% on amounts
over $15,000. There are different rates if the
payments are made in Quebec. For more information
on Quebec rates, please visit our website. These
rates are just
an estimate and the employees may still owe
tax at the end of the year. Now
that we have an understanding of the different
types of payments and how to withhold income
tax on them, we will discuss how to
remit your payroll deductions. To remit your payroll
deductions, you will have to register for an
account with the CRA. So, in this section
of our webinar, we will look into
registration of a Business and Payroll account with
the CRA and make your remittance or payment
to the CRA. You have to register for
a payroll program account before the first remittance
due date. If you already have a business
number BN , you only have to add
a payroll account. If you do not have
a BN, you have to
register for a BN and a payroll account.
You can register an account with the CRA
using 3 different options Online at CRA's website.
By mailing or faxing your completed RC1 form,
Request for a Business Number. And last but
not least, you can phone at 1-800-959-5525.
You will have to have some personal and
business information handy to complete the application process.
Now that you have registered for your payroll
account let us talk more about how and
when to remit. Remember the payroll cycle from
the previous webinar? The employer calculates the employee's
gross pay and withholds the CPP, EI and
income tax
from the employees. It is very important to
note that the amounts the employer withholds from
their employees are funds held in trust for
the Government of Canada. The CRA does not
specifically require the employer to keep the funds
in a separate bank account, but they must
be held separate and apart from the business
operating funds. The
employer must also then contribute their portion of
CPP contributions and EI premiums. Together, these will
form the remittance amount that the employer must
send to the CRA. Remember to calculate the
deductions, you can either use PDOC, provincial or
territorial tax tables, or manual calculation for CPP
and EI. The
PDOC can help you figure out your share,
as well. At the bottom of the results
page, you have the option to print an
employer remittance summary. It is important to understand
that it does not matter when the employee
worked. What matters is when the employer paid
the employee because that is the date that
the employer withheld the source deductions. Employers have
to
remit these amounts to the CRA on a
regular basis. How often an employer remits their
source deductions depends on when they pay their
employees and how much they withhold. If the
due date is a Saturday, Sunday or a
public holiday, your remittance is due the next
business day. There are different types of remitters
that are determined
by your average monthly withholding amount of two
calendar years ago. Most new employers are regular
remitters. That means that they have to make
their remittance to the CRA no later than
the 15th of the month following the month
in which they withheld the source deductions. For
example, for the month of September, if an
employee is paid weekly on Fridays,
the employer withholds the source deductions every Friday.
As a regular remitter, the employer must add
up all the amounts withheld during the month
of September, plus add their portion of CPP
and EI, and remit that amount to the
CRA by October 15, 2015. It's very important
to understand that the CRA must receive the
remittance
by October 15. It's not good enough to
mail a cheque by the 15th. If the
CRA receives the remittance later than the 15th,
the employer may have to pay a penalty
and interest on the late payment. Starting in
2016, certain new employers will be able to
remit their payroll deductions on a quarterly basis.
This would apply to
new employers who have a monthly remittance of
less than $1,000. They must maintain perfect compliance
on their payroll and GST/HST account while they
are a quarterly remitter. Please keep in mind
that this probably will not apply to you
unless your first pay date is after December
31, 2015. The CRA will let new employers
know
if they can remit quarterly when we send
the employer their first remittance form. So, unless
you are advised by the CRA that you
qualify as a quarterly remitter, please continue to
remit monthly. The CRA will determine the eligibility
when employers open their payroll account. You might
be asking yourself, how will we do this
when the account is brand new? Well,
it will depend on the information you as
the employer provide on your payroll account application
form. Due dates for these quarterly remitters is
exactly the same as the due dates for
the existing quarterly remitter category on or before
the 15th of April, July, October and January.
Payroll and GST accounts will be reviewed quarterly
to ensure the new
employer continues to be eligible. If, in the
quarter, the employer's monthly remittance is $1,000 or
more, or, during the previous 12 months, the
employer is no longer compliant with their Payroll
or GST/HST obligations, they will revert to regular
remitters and must send in their remittances on
a monthly basis. The CRA will advise you,
the employer of this by letter.
Some employers qualify to remit their payroll deductions
every quarter, rather than every month. This is
the case for existing employers whose average monthly
withholding amount is less than $3,000 and who
have at least one year of perfect compliance
history. If you were with us in our
previous webinar, you will remember that
John and Mary are the only employees of
this particular employer. For this employer, the average
monthly withholding amount is below $3,000. After one
full year of withholding, remitting, and filing correctly
and on time, this employer would be eligible
to become a quarterly remitter. To recap, the
due dates for all quarterly remittances to the
CRA
are the 15th of April, July, October, and
January. Talking about remitter types, some employers have
to remit their payroll deductions more frequently. They
fall under the ?accelerated' remitter category and their
due dates can be sooner after the end
of their pay period. However, most new employers
will not be affected by the accelerated
frequency, so we will not be discussing those
obligations in this webinar. If you want more
information about accelerated remitters, you can find it
on the CRA website. So, now that we
know when to remit, the next question is
how to remit? Sending in your remittance if
you already have a remittance form is easy.
However, some of you may not yet have
a payroll
account or a remittance form. This slide shows
you how to make your remittance if you
don't have an account or you don't have
a remittance form. Send a cheque or money
order to any tax centre. Make the cheque
or money order payable to the Receiver General.
Make sure you print your payroll program account
on the front. Include a letter stating that
you are a new remitter
the period the remittance covers your complete business
name, address, and telephone number and your payroll
program account number. We will send you a
remittance form in the mail after you register
and after each remittance. If you do not
receive a form in time for your next
remittance, or you lost or misplaced your remittance
form, send in your
remittance as described in this slide. In your
letter, be sure to tell us that you
did not receive your remittance form, if that
is the case. Now that you have your
remittance ready and if you are wondering how
to make that remittance to the CRA, there
are several methods. You can use online payment
methods such as online banking, debit card, credit
card, pre-authorized
debit, or third-party service provider. There are also
other payment methods such as at a financial
institution, wire transfers, or by mail. Something to
think about here is that, making your remittances
has never been easier. Consider paying online. You
can make your payment anytime, from anywhere. We
discussed
payroll remittances and methods, and how making a
payment online is convenient. Now we can talk
about how securely accessing your account anytime, anywhere
using My Business Account or My BA for
short . My BA - What is it?
And how can this be useful to all
of you, business owners? My BA is a
secure online portal that
provides an opportunity to interact electronically with the
CRA on various business accounts. Business accounts include
GST/HST, payroll, corporation income taxes, excise taxes, excise
duties, and more. My BA is convenient, and
is available to you 21 hours a day,
7 days a week. It is easy to
use. So after registering, simply
log in with your CRA user ID and
password. And it is fast. You have up-to-the-minute
information and transactions processed immediately. It can be
used for a variety of services like the
ones listed on this slide. To register or
to read more about what you can do
on My BA go to the CRA website.
What
happens when the CRA receives your remittance after
the due date? If you do not remit
on time, depending on how late your remittance
is, you may be charged a penalty of
3, 5, 7, or 10% of the amount
of the remittance. If you are assessed one
of these penalties more than once in a
calendar year, the second or subsequent failures, may
result in a penalty of 20%
of the amount you should have withheld or
paid. This might seem severe but these are
trust funds that you deducted from your employees
and we have to make sure you remit
them on time. As you already know, if
your remittance is due on a Saturday, a
Sunday, or a public holiday, your remittance is
due on the next business day. On the
screen, are the
references that you will find useful and where
you will find more information on what we
talked about today.