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For example, if an employee earned $4,500 gross pay each month this is how to calculate how
much EI to deduct from the employee’s pay in January.
Gross Pay x Current EI Rate = EI Deduction
$4,500 x 1.88% = $84.60 EI Deduction
By the end of November, the employee would have earned $49,500 ($4,500 x 11 months) and have
had $930.60 ($84.60 x 11 months) deducted for EI. Since this is the maximum amount of EI that
can be deducted for the year, the next pay at the end of December will have no deduction for EI.
This means the net pay for December will be higher than in the previous months.
Income Tax Calculations
The calculation of income tax is a little more involved than the calculation of CPP or EI. Every
employee receives tax credits. Tax credits allow an employee to earn a certain amount of money
and not have to pay any income tax on that amount. Tax credits are dependent upon the personal
situation of the employee and increasewith factors such as young children,disabilities,a non-working
spouse, etc.The total tax credits claimed by an employee are related to claim codes (numbered 0 to
10), which assist in determining how much income tax to deduct from the employee’s pay.
To calculate total tax credits and determine an employee’s claim code, employers should issue a TD1
form to new employees when they are hired, and ideally at the beginning of each year in case an
employee’s personal circumstances change. Employees complete the form based on their personal
circumstances and total the tax credits they will receive. If an employer neglects or forgets to provide a TD1
form to employees, by default the employee will only receive a basic tax credit and will be given a claim code 1.
If an employee does not take advantage of the tax credits on the TD1 form, it does not mean they will miss
out on the tax credits they are entitled to. At the end of the year when the employee completes their tax
return, they can claim all the tax credits they are entitled to and receive a tax refund from the government.
INTHE REAL WORLD
If a business is going to manually prepare its payroll, it will need to use the income tax tables
available from the CRA website. A sample federal monthly tax table taken from the CRA website
is shown Figure 11A.1. The income tax tables are divided into the main pay periods (monthly,
semi-monthly, bi-weekly and weekly) for both the federal and provincial income tax amounts.
Once the correct pay period is selected, it is just a matter of using the employee’s gross pay (listed
down the left side of the table) and tax credit claim code (CC 0 to CC 10 across the top of the
table) to determine the amount of income tax to deduct. For example, a person paid $1,700 per
month and a claim code of 1 will have $84.40 deducted for federal income tax.
Chapter 11 Appendix
Payroll
