Don’t fall for the Employment Insurance Tax Trap in 2024

Employment Insurance (EI) provides a valuable safety net for Canadian workers who lose their jobs or take parental leave. However, many Canadians don't realize that EI benefits are taxable, and they end up owing more money than expected when filing their tax returns. As EI premium rates and maximum insurable earnings increase in 2024, it's important for employees and employers to understand how these changes may impact them.

Key Changes to EI Premiums in 2024

  • The EI premium rate for employees will increase from $1.63 to $1.66 per $100 of insurable earnings. This translates to an increase from 1.63% to 1.66%.
  • The maximum insurable earnings will rise from $61,500 in 2023 to $63,200 in 2024. This is the maximum amount of income subject to EI premiums.
  • As a result, the maximum annual EI premium for employees will be $1,049.12 in 2024, up from $1,002.45 in 2023.
  • For employers, the EI premium rate will be 1.4 times the employee rate. So in 2024, employers will pay $2.32 per $100 of employee insurable earnings.

Why EI Benefits are Taxable

When receiving EI payments, some tax is usually withheld. However, this withheld amount often does not cover the full taxes owed on EI income.

EI benefits have to be reported as taxable income when filing your tax return. The benefits will be taxed based on your total income and tax bracket for the year. Often, people end up in a higher tax bracket once EI income is included.

For example, if you received $20,000 in EI benefits in 2024, 10% tax may have been deducted from the payments. But once the $20,000 is added to your other 2024 income, it could push you into a 20% or 30% tax bracket for the year.

Watch Out for Higher Than Expected Tax Bills

When tax time comes around, many Canadians are surprised to owe more money on their tax returns, especially in years they collected EI. This results in an unexpected financial hit.

To avoid this EI tax trap, it's important to set aside money throughout the year to cover the extra taxes. As a guideline, set aside 30% of your EI payments to account for federal and provincial taxes. This should cover the additional taxes owed in most cases.

You can also make additional tax instalment payments to the CRA during the year you are collecting EI. This helps avoid getting hit with a big tax bill when filing your return.

How Employers Are Impacted in 2024

Along with the EI rate hike in 2024, employers will also have to pay more in premiums up to the $63,200 maximum insurable earnings per employee.

Based on the increased 1.4x employer rate, companies will pay a maximum of $1,468 per employee towards EI premiums in 2024 rather than $1,403 in 2023.

This will raise payroll costs for Canadian businesses at a time many are already struggling with inflation and supply chain constraints. Employers should budget for the rise in EI premium expenses accordingly.

Changes to CPP Contributions in 2024

In addition to higher EI costs, enhanced Canada Pension Plan (CPP) premiums will start being deducted from employees earning over $68,500 in 2024. This results from legislation passed in 2016 to boost CPP payouts in the future.

Here are the key changes:

  • The existing employee/employer CPP contribution rate of 5.95% will remain up to $68,500 of pensionable earnings. This maximum contribution will be $3,867.50 each in 2024.
  • Earnings between $68,500 and $73,200 will be subject to a new 4% CPP contribution rate. The maximum employee portion will be $188 in 2024. Employers will match this dollar for dollar.
  • Combined, the maximum CPP contribution will rise from $3,867.50 currently to $4,055.50 (including the new bracket) in 2024.

While these CPP changes won't impact all employees, higher earners and their employers should prepare for larger deductions.

Plan Ahead to Avoid an Unexpected Tax Hit

With higher EI and CPP costs on the horizon, Canadian workers and businesses need to take action to avoid financial surprises. Carefully review upcoming 2024 payroll deductions and set aside funds to cover additional tax obligations down the road.

The EI tax trap catches many people off guard each year. But with proper planning and budgeting, you can be prepared to pay what you owe and avoid scrambling to find money at tax time 2025. Pay attention to tax changes impacting 2024 to keep more money in your pocket.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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