Understanding the tax deductions on your pay
As an employee you may have certain doubts or may not be fully clear in regard to the deductions which are made by your employer on your pay. We at “The Accounting Tax” have been into financial consulting since long and have helped both individuals as well as companies understanding matters in relation to finance and tax. Through this blog we will try to provide you with a basic understanding about Tax deductions on your pay.
What the employer must deduct from the payouts to their employees?
As per the Canadian law an employer must deduct the following amounts from the employment earnings of their employees.
- Income Tax
- Employee contributions which are to be made to Employment Insurance (EI)
- Employment contributions to the Canada Pension Plan.
These deductions pertain to the amount which would be deducted from your pay cheque prior to payment of your earnings. The employer is to deduct the amounts as mentioned above as per the appropriate rates and remit the same to the Canada Revenue Agency (CRA) as specified by law. However, you would get credit for the same. These are reported on your T4 when you file your annual tax return.
The rates of the deductions made
- Income Tax
In Canada you are to pay income tax as per the rates specified. The rate of the tax goes up as your income goes up. You need to pay as specified in the federal tax rate structure. In addition to the federal tax you must pay the provincial tax. This, however, varies as per the province in which you are based.
- Canada Pension Plan (CPP) and Employment Insurance (EI)
These programs which are mainly focused on employee welfare are ones that are run by the federal government and participation is mandatory. Through this you may benefit in the future by receiving payments from these programs. For example, EI protects workers who become unemployed by paying out benefits to those who apply and qualify. Once you would retire after age 60, the CPP pays benefits to seniors who qualify.
In addition to the amounts that are deducted and withheld from your pay, your employer also makes contributions to EI and CPP on your behalf. The amounts depend on how much you contribute.
Apart from these there are additional payroll deductions in which you voluntarily may choose to participate. These are in regard to pension plan, group insurance and RRSP savings plan. If you participate in these programs it is true that your net take home pay would reduce at present. But these would help you in the future.
In conclusion we hope that we have been able to provide you with a basic idea about the tax deductions on your pay as an employee. To know about tax or other financial matters please visit our website.
