CPP and EI considerations for the self-employed business owners and owner-managers
Knowing the rules of Deductions at Source (DAS) for the Canada Pension Plan (CPP) and Employment Insurance (EI) is important for small businessesin Toronto and Mississauga because; a) errors in payroll remittances to the government can result in hefty penalties and b) it is a significant consideration for when deciding to pay out to the owner-manager(s) salary or dividend.
Canada Pension Plan
Contributions to the CPP give the contributor the right to retirement benefits upon reaching retirement age. Unlike regular retirement plans (such as RRSP and RPP), however, contributions to CPP are not optional.
ALLsalaries paid by the small business, including the owner-manager’s salary, are subject to CPP deductions at source (DAS).These deductions are calculated as such:
- Deduction from the salary payment: 4.95% of gross salary.
- Employer contribution, beyond that withheld from the employee’s salary: 4.95% of gross salary.
- Only the first $52,500of gross annual salary paid to an employee is subject to CPP. This results in a maximum annual CPP contribution of$2,425.50.
- The basic exemption is $3,500 i.e. the first $3,500 of salary paid out per year is not subject to CPP contributions.
Unincorporated self-employed individuals are also subject to CPP. However, they do not need to remit it to the government on a regular basis. Instead their CPP contribution will be calculated at year end when filing their personal income taxes and will be payable to the CRA along with the payment of their income tax balance in April.
Employees, in general, have to pay EI as part of the DAS. However, self-employed individuals and business owners as well as their immediate family, with over 40% ownership of the voting shares of a company,are exempt. They may, however, elect to pay EI contributions if they so wish and such election would give them access to EI benefits in the event of interruption of their income.For information on opting in please visit the website of Service Canada.
EI DAS are computed as 1.88% of the employee’s earnings for the period up to an annual limit for insurable earnings of $48,600. The employer’s share of the EI contribution is 2.63% of the insurable earnings of the employee up to the same annual limit.
Keep in mind that when self-employed individuals opt into the EI program they are only required to pay the 1.88% employee share of the contributions. This is in contrast to the CPP where self-employed individuals pay twice the amount paid by regular employees as they pay both the employee and employer shares.
The CRA provides a great tool to help small businessesin Canada to compute their DAS including CPP and EI discussed above. There are many payroll services providers throughout Toronto, Mississauga and the rest of the country who can assist your small business with your payroll filings.
As Chartered Accountants in Toronto and Mississauga we can help you prepare your payroll filings and help assess whether you should be deducting amounts at source from your employees. Contact a Chartered Accountant for more tax tips by email at email@example.com or call us at 647-725-2537 for a free consultation.