When an employee in Ontario receives their paycheck, there are certain mandatory deductions that come off the top before the net pay is calculated. These deductions include federal tax, provincial tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. The amount of tax deducted from each paycheck is determined by an employee's salary, how frequently they are paid, their tax credits and deductions, and the federal and provincial tax rates and brackets. Employers use tax tables provided by the Canada Revenue Agency (CRA) each year to calculate how much tax to withhold from employees' pay.Below is an overview of how tax deductions are calculated on paychecks in Ontario and the mandatory contributions that impact an employee's net pay.
Calculating Income Tax Deductions
Both the federal and Ontario provincial governments levy personal income taxes based on an employee's annual taxable income. Tax deductions withheld from each paycheck are based on estimates of what an employee will owe in taxes for the whole year.Canada has a graduated income tax system with different tax brackets based on income ranges. As taxable income increases, it is taxed at higher rates. Both the federal and Ontario tax systems work this way. Here are the 2024 federal and Ontario personal income tax bracket thresholds:
2024 Federal Tax Brackets and Rates
- 15% on taxable income of $53,359 or less
- 20.5% on income between $53,359 and $106,717
- 26% on income between $106,717 and $165,430
- 29% on income between $165,430 and $235,675
- 33% on income over $235,675
2024 Ontario Tax Brackets and Rates
- 5.05% on taxable income of $49,231 or less
- 9.15% on income between $49,231 and $98,463
- 11.16% on income between $98,463 and $150,000
- 12.16% on income between $150,000 and $220,000
- 13.16% on income over $220,000
To estimate an employee's annual tax liability, their taxable income is applied to the federal and provincial tax rates in the brackets it falls under. The amounts owed under each bracket are added together to determine the total tax owed. The number of pay periods in the year (typically 26 for biweekly pay or 52 for weekly pay) then divides this annual tax amount evenly. The prorated tax amount comes off the employee's gross pay each pay period.
The Canada Revenue Agency provides federal and Ontario tax deduction tables to help employers calculate income tax withholdings for different incomes and pay frequencies.The tax deduction tables factor in tax brackets, some common tax credits, and applicable surtaxes. However, the amount withheld is still an estimate, and employees must file an annual tax return to determine their final tax liability based on their actual annual income and deductions and receive any refund or pay any balance owing.
Canada Pension Plan (CPP)
The Canada Pension Plan (CPP) is a contributory pension plan that provides retirement, disability, survivor, and death benefits to Canadian workers and their families.Both employees and employers must contribute to CPP. For 2024, the contribution rate is 5.95% each for employees and employers on pensionable earnings.The maximum pensionable earnings amount for 2024 is $66,600. The basic exemption is $3,500. No CPP contributions are required on the first $3,500 of earnings. CPP contributions are calculated as follows:
(Annual Earnings minus $3,500 Basic Exemption) x 5.95%
The maximum employee contribution for 2024 is $4,068.30. Employers match the CPP contributions dollar for dollar.CPP contributions are deducted from each paycheck until the maximum annual contribution is reached. CPP deductions then stop until the following year.
Employment Insurance (EI) Premiums
Employment Insurance (EI) provides temporary financial assistance to eligible Canadian workers who have lost their job through no fault of their own. Employers and employees both contribute to the program's funding by paying EI premiums. Employees will pay premiums equal to 1.63% of their insurable earnings in 2024. Employers contribute 1.4 times the employee rate, or 2.284% of insurable earnings.The maximum annual insurable earnings amount is $60,300 for 2024. Once an employee reaches the maximum for the year, EI premium deductions stop until the next year.The maximum annual EI premium in 2024 is $986.40 for employees and $1,381 for employers.
Other Payroll Deductions
In addition to statutory deductions like income tax, CPP contributions, and EI premiums that must come off employees’ pay, other common payroll deductions include:
- Registered pension plan contributions: If an employee belongs to an employer-sponsored registered pension plan (RPP), required contributions are deducted from their pay.
- Union dues: Unionized workplaces deduct union dues from members' paychecks.
- Supplemental health and/or dental premiums: If employees have supplemental health and/or dental coverage through their workplace, they often share in covering some of the premium costs. Their share of monthly premiums can be deducted from their pay.
- Charitable donations: Employees can have recurring payroll deductions set up to make regular charitable donations.
- RRSP contributions: At the employee's request, employers can deduct RRSP contributions from pay and remit them directly to the employee's RRSP.
- Garnishments: In certain situations, such as for spousal or child support or outstanding debts, garnishment orders can require deductions from wages to pay a third party.
Any additional voluntary or involuntary deductions beyond the statutory contributions should be clearly noted on the employee’s pay statement.
Steps for Calculating Deductions in Ontario
When processing payroll, employers in Ontario must follow these general steps to calculate deductions for each employee:
- Determine gross pay: Add up all taxable income paid to the employee for the pay period, including regular wages, overtime, bonuses, vacation pay, taxable benefits, etc.
- Calculate CPP contributions: multiply gross pay minus $3,500 exemption by the 5.95% CPP rate. Stop deducting CPP when the maximum for the year is reached.
- Calculate EI premiums: multiply gross insurable earnings by 1.63%. Stop deducting EI premiums when the maximum for the year is reached.
- Determine taxable income: Subtract any non-taxable income or tax-exempt benefits or allowances from gross pay to determine taxable income.
- Calculate income tax: Look up the federal and provincial tax amounts to withhold based on pay period taxable income and the TD1 amounts using the tax deduction tables.
- Make any additional deductions. Deduct any other regular payroll deductions (e.g., pension plan contributions, union dues, health premiums, charitable donations, etc.).
- Calculate net pay: Subtract total deductions, including income tax, CPP, EI, and any additional deductions, from gross pay to determine the final net pay amount.
Impact of Tax Deductions on Take-Home Pay
The combined effect of federal tax, provincial tax, CPP contributions, EI premiums, and any additional payroll deductions can significantly reduce an employee’s take-home pay versus their gross earnings.For example, an employee earning $60,000 per year paid biweekly would have the following approximate payroll deductions per pay period:
- Federal tax: $460
- Provincial tax: $190
- CPP: $240
- EI: $65
That results in $955 per pay period in just basic statutory payroll deductions. Any additional deductions for things like health insurance premiums, pension contributions, or union dues further eat into net take-home pay. Tax deductions consume an even greater percentage of employees' gross pay in higher income tax brackets. It is important for employees to understand how Canada’s tax system works and plan their personal finances accordingly based on their after-tax income.
Conclusion
Determining payroll deductions in Ontario involves calculating federal tax, provincial tax, CPP contributions, and EI premiums based on an employee’s taxable income and deducting these amounts from gross pay for each pay period.Employers must follow Canada Revenue Agency guidelines and use the provided tax deduction tables to accurately calculate income tax withholdings. CPP and EI also have annual maximum contribution amounts that impact how much is deducted from employees’ paychecks.While mandatory deductions reduce employees’ net take-home pay versus gross earnings, these contributions fund important social programs and benefits. Employees should understand how tax deductions are calculated in Ontario and budget based on their after-tax income.