Accounting 20
Module 2
Lesson 6
Accounting 20
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Lesson 6
Accounting 20
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Lesson 6
Lesson 6 - Payroll
NOTE: In order to obtain totals for 2009 CPP/EI you can go to Canada
Revenue Agency website.
 www.cra-arc.gc.ca/menu-e.html
 In the Search the site box enter: CPP/EI Deduction Tables 2009
 Find the title: T4032 Payroll Deductions Table – Previous years
Topics:

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Introduction
Payroll Records
Payroll Deductions
Calculation of the Payroll
The Payroll Register
The Earnings Record
Paying the Payroll
Remember These Important Points
Do You Understand?
Conclusion
Self Test
Answers for Self Test
Assignment 6
After studying lesson 6, the student should be able to

calculate the gross pay and net pay for each employee from given payroll data.

complete a payroll table showing employee contribution, employer contribution and
the combined total contribution to CPP.

calculate from given payroll data the EI premium for each employee, the employer’s
premium for each employee and the total premium to be mailed to Canada Revenue
Agency--Taxation.

calculate from given payroll data the amount of income tax to withhold from
employees’ pay.

complete a table of payroll data showing the amount of net pay for each employee
for a given payroll period.

prepare time cards and salary payroll registers.
Accounting 20
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Lesson 6
Accounting 20
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Lesson 6
Introduction
The term payroll refers to that part of the accounting process that deals with salaries,
wages, and commissions paid to employees. Payroll may seem simple to the worker who
receives money in return for his time and effort; however, it is a complex process, and the
person in charge of it has a great deal of responsibility. An understanding of payroll
accounting and the design and use of payroll records requires knowledge of the laws and
the programs that affect payroll.
Both federal and provincial governments have passed legislation that greatly affects
payroll procedures. Examples include the Income Tax Act, the Employment Insurance
Act, and the Canada Pension Act. These acts set out regulations that employers, by law,
must follow. Canada Revenue Agency supplies booklets outlining all federal rules and
regulations.
Accounting 20
5
Lesson 6
Payroll Records
One of the most important areas of business is that of accounting for employee’s salaries
and wages. Complete and accurate records must be kept and maintained as employees
expect to receive their pay when it is due.
The amount of money paid to an employee is known as a wage or salary. Wages are
payments to workers for their labour, on an hourly, daily, or weekly basis. Salaries are
paid to employees such as administrative assistants, teachers, executives, and civil
servants.
Various methods are used today for keeping and doing payroll. The number of employees,
the size and nature of the business, the types of equipment available, and the time
required to do the work are all factors which affect how the payroll records will be
maintained.
However, today there is a trend towards using computerized payroll systems to maintain
payroll records for each employee.
Collecting Payroll Data
A payroll application begins with the collection of important data on each employee. This
data consists of the following items:

Employee’s social insurance number.

TD1 form or Personal Tax Credits Return.

Salaried payroll plans.

Regular pay, overtime pay, vacation and statutory holiday pay.

Employee payroll deductions.
Accounting 20
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Lesson 6
Social Insurance Number
All employees must have a card which contains a social insurance number (SIN). This
number is important since they need it to do any of the following:

Open a bank account.

Complete first income tax form (form TD1).

Receive first pay cheque.

File personal income tax returns.

Receive employment insurance premiums.

Start Canada Pension Plan.
When contributions are made, they are credited to an employee’s SIN.
Every employer must obtain the correct SIN from each employee. If an employer does not
make a reasonable effort to obtain an employee’s SIN, she/he may be subject to a penalty
of $100 for each failure. Under the Canada Pension Plan Regulations, employers must tell
their employees how to obtain a SIN or how to replace a SIN card. In addition, an
incorrect SIN can affect an employee’s future CPP benefits if the record of earning is not
accurate. Therefore, the onus is on the employer to use the correct name and number as
shown on the employee’s SIN card.
Employees also have to give their employers their correct SIN. If an employee does not do
this, that employee may be subject to a penalty of $100 for each failure. Employees need
to contact their local Human Resources Centre of Canada within three days of the day
they start work, and they must also provide employers with their new SIN once they
receive it.
Accounting 20
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Lesson 6
The TD1 Form (Personal Tax Credit Return)
The TD1 form is the first income tax form normally completed by employees at the start of
a new job. The employer uses this form to determine the amount of income tax that
should be deducted from an employee’s pay and the amount of personal tax credits.
The total of each employee’s personal tax credits is deducted from income to determine the
level of income tax deduction from the individual’s gross pay. Employers are responsible
for determining the amount of income tax owed by each employee every payday and
withholding it from her/his pay for that period. In order to do this, an employer must
know the credits claimed by each employee. Consequently, each employee must file with
the employer an employee’s Personal Tax Credit Return, Form TD1, on which she/he
claims the applicable credit. The TD1 Form is illustrated on the following page.
In determining the amounts of income taxes to withhold from the wages of employees,
employers use tax withholding tables provided by Canada Revenue Agency. The tables
indicate the tax to withhold from wages with any number of credits. In addition,
employers are required to remit the withheld taxes to the Receiver General for Canada
each month.
Accounting 20
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Lesson 6
Insert the 2009 Personal Tax Credit Return Form
TD1 Form as an
example of what information this form contains
Accounting 20
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Lesson 6
2nd page of Personal Tax Credit Return form – TD1 form.
Accounting 20
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Lesson 6
The Salaried Payroll Plan
A payroll system based on a salary or wage is a fixed sum payable after an employee
works a certain length of time. This fixed sum becomes the employee’s earned gross pay
which is the amount before payroll deductions. The payroll plan pays each employee a
predetermined amount at the end of a specific, fixed payroll period. The period covered by
the wage or salary payment is called a pay period. This period may be

Weekly - once a week, or 52 times a year.

Bi-weekly - every two weeks, or 26 times a year.

Semi-monthly - twice a month, or 24 times a year.

Monthly - once a month, or 12 times a year.

Daily - at the end of each day. This method is sometimes used by companies who
need workers for special jobs, such as on construction jobs, that may last only for a
day or two.
Methods of Paying Employees
Depending on the work being done, employers may use a variety of methods to calculate
the gross earnings of their employees. The various methods include:

Salary - is paid to office workers, supervisors, executives, and to most employees of
municipal, provincial, and federal governments. Salaries are usually on a yearly
basis with payments made monthly or semi-monthly. If an employee makes a
yearly salary of $24 000.00, on a monthly rate s/he would receive $24 000  12 or $2
000 a month. The rate semi - monthly would be $2 000  2 or $1 000.

Commission - sales personnel are often paid on a commission basis; their earnings
are determined by the amount of sales they make. The gross earnings for a
salesperson who gets a 5% commission and had sales of $6 570 are $328.50 (0.05 x
$6 570 = $328.50).

Combination of Salary and Commission - it is more common to see a combination of
a set minimum salary plus a commission on sales. These may be paid to travelling
sales representatives and to sales clerks in some large stores. An example would be
a minimum weekly salary of $200 plus 3% of all sales made above $7 000. The
gross earnings in a week, where the salesperson’s sales are
$9 000, would be $200 plus 3% of $2 000, which works out to $260 ($200 + 0.03 x
2 000).
Accounting 20
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Lesson 6

Piece Rate - to provide an incentive to workers, some jobs are paid according to the
number of units the worker produces. If an employee is paid $1.25 per unit and
completes 203 units, the employee’s gross earnings will be $253.75 ($203 x 1.25 =
253.75).

Hourly Rate - most labourers are paid according to the number of hours they work
in the time period. An employee working at the rate of $6.10 per hour, and who
works 40 hours in the week, would earn $244 ($6.10 x 40 - 244).
Employee’s Individual Earnings Record
Once an employee’s salary and pay period are established, this information and other
important employee data are recorded in the top portion of an employee’s individual
earnings record. The payroll record shows an individual employee’s payroll details for
each pay period. The payroll record may be in the form of a card or a computer printout.
An example follows.
Insert and example of an Employee’s Individual Earnings Record form.
Payroll Deductions
After an employee’s gross pay is calculated, payroll accounting must determine and then
subtract the deductions from gross pay. This leaves the employee with net pay. The three
most common payroll deductions are for the Canada Pension Plan, Employment
Insurance, and Income Tax.
Accounting 20
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Lesson 6
Canada Pension Plan (CPP)
The Canada Pension Plan or Old Age Pension Plan was established in 1965. Deductions
on behalf of the plan began in January, 1966. Every employee and self-employed person
between the ages of 18 and 70 must make contributions in required amounts to the
Canada Pension Plan (CPP). Employee contributions are deducted by the employer from
salary, wages, or other remuneration paid to the employee. Each employer is required to
contribute an amount equal to that deducted from the employee’s earnings.
Example:
CPP contributions deducted from` employees in month
Employer share of CPP contributions
$240.40
$240.40
Total amount sent in for CPP contributions
$480.80
Employers will deduct employees’ Canada Pension Plan contributions from salary, wages,
or other remuneration. This includes any taxable benefits paid or provided by the
employer. Each year, Canada Revenue Agency determines

a maximum amount of pensionable earnings from which to deduct CPP ($42,100 for
2006);

a basic yearly exemption which is a base amount form which employers do not
deduct CPP contributions ($3,500 for 2006); and

a rate used to calculate the amount to deduct form employees (4.95% for 2006).
With Canada Pension Plan contributions, what employers deduct can be determined by
using the table method, or the tables on diskette (TOD) method, or the manual calculation
method. In this course, the table method will be used.
The Payroll Deductions Tables for the current tax year are used to determine the amount
employers should deduct from employees’ remuneration. The amount indicated in the
tables already includes the basic yearly exemption.
The first step is to find the page that corresponds with the pay period. For example, if the
employee is paid weekly, then the employer will go to the “Weekly (52 pay periods a year)”
table. The second step is to locate the “Pay” column of the bracket that includes the
employee’s gross pay (includes any taxable benefits). Beside this amount is a
corresponding amount in the “CPP” column. This is the amount of contributions
employers will withhold from the employee’s pay, and employers will pay the same
amount as the employee.
Accounting 20
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Lesson 6
Employment Insurance (E.I)
Employers and employees have to pay Employment Insurance (EI) premiums on gratuities
and remuneration from insurable employment. Insurable employment includes most
employment under a contract of service (employer-employee relationship), and there is no
age limit for deducting EI premiums.
Employers must withhold Employment Insurance (EI) premiums from each dollar of
insurable earnings up to the yearly maximum. For 2006, the maximum annual insurable
earnings is $39,000.
With Employment Insurance premiums, what employers must deduct can be determined
by using the table method or the tables on diskette (TOD) method or the manual
calculation method. In this course, the table method will be used.
The first step is to locate the “Insurable Earnings” column for the bracket that lists the
employee’s insurable earnings. Beside this bracket is a corresponding amount in the “EI
premium” column. Employers must pay 1.4 times this amount in relation to the
employee’s premium.
The Employment Insurance Act requires that an employer

withhold from the wages of each employee each payday an amount of employment
insurance tax calculated at the current rate.

pay an employment insurance tax equal to 1.4 times the amount withheld from the
wages of all employees.

remit periodically both the amounts withheld from employees’ wages and the
employer’s tax to the Receiver General for Canada.

complete a “Record of Employment” form for employees who experience an
interruption of earnings because of termination of employment, illness, injury, or
pregnancy.

keep a record for each employee that shows wages subject to employment insurance
and taxes withheld.
An employee’s Earnings Record accumulates information that

serves as a basis for the employer’s payroll tax returns.

indicates when an employee’s earnings have reached the maximum amounts for
CPP and EI deductions.

supplies data for the T4 slip which must be given to the employee at the end of the
year or on or before the last day of February.
Accounting 20
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Lesson 6
Bob Donnelly
Employee’s Name
Home
Address
SIN. No.
Employee No.
Notify in Case
Phone
of Emergency Margaret Donnelly No.
111 Greenwood Avenue
Date
Employed May 15, 1993
123-456-789
Date of
Termination.
Clerk
Time
Lost
Date
585-9834
Reason
Date of
Date
Male
(X) Married ( ) Number of
June 6, 1972 Becomes 65 June 6, 2037 Female ( ) Single (X) Exemptions
Birth
Occupation
114
0
Pay
$10.00
Rate
Warehouse
Place
Time
Worked
E.I.
Prem.
Income
Taxes
Hosp.
Ins.
CPP
Total
Deductions
400.00
12.00
80.00
18.00
9.03
119.03
280.97
673
280.97
400.00
12.00
80.00
18.00
9.03
119.03
280.97
701
561.94
400.00
400.00
12.00
80.00
18.00
9.03
119.03
280.97
743
842.91
36
360.00
360.00
10.80
72.00
18.00
7.95
108.75
251.25
795
1,094.16
40
400.00
400.00
12.00
80.00
18.00
9.03
119.03
280.97
839
1,375.13
Fe 10
40
400.00
400.00
12.00
80.00
18.00
9.03
119.03
280.97
854
1,656.10
Fe 17
40
400.00
400.00
12.00
80.00
18.00
9.03
119.03
280.97
893
1,937.07
Fe 24
Fe 24
40
400.00
400.00
12.00
80.00
18.00
9.03
119.03
280.97
932
2,218.04
Ju 11
Ju 11
40
400.00
400.00
12.00
80.00
18.00
9.03
119.03
280.97
1517
6,432.59
Per.
Ends
Paid
Hrs
.
Ja 6
Ja 6
40
400.00
Ja 13
Ja 13
40
400.00
Ja 20
Ja 20
40
Ja 27
Ja 27
Fe 3
Fe 3
Fe 10
Fe 17
4
Reason
Sick
Total
O.T.
Hrs
Reg.
Pay
O.T.
Prem.
Pay
Gross
Pay
Net
Pay
Cheq.
No.
Cumulative
Pay
The payroll information on an employee’s Earnings Record is taken from the Payroll
Register. Then, each pay period, the information is posted from the Payroll Register to the
earnings record. The last column of the record below shows an employee’s cumulative
earnings and this is used to determine when the earnings reach the maximum amounts
taxed and are no longer subject to payroll taxes.
Insert an example of a Payroll Register form showing several employee’s information
Accounting 20
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Lesson 6
Income Tax
Since 1917, all Canadians have had to pay income tax on their earnings. Employers must
deduct income tax from each employee’s salary, wages and commissions, bonuses, vacation
pay, and any other type of earnings. Such deductions are called income tax deductions at
source.
Both the federal and the provincial governments enforce income tax acts which require
income taxes to be deducted.
To simplify collection and remittances, all the provinces, with the exception of Quebec,
have agreed to allow the Canadian government to collect from employers both federal and
provincial income taxes as a lump sum. In Quebec, separate collections and remittances
are required, one to the Receiver General for Canada for federal tax and one to the
Treasurer of Quebec for provincial tax.
Both levels of government set their own rates of income tax. For that reason, Canada
Revenue Agency--Taxation publishes each year a separate booklet of tax tables for each
province. Except in Quebec, the booklet of tables combines the income taxes to be
collected for the federal government and for the province.
Employers are responsible for deducting income tax from the remuneration they pay their
employees. Sources of remuneration include:






Salary or wages
Tips and gratuities
Bonuses and vacation pay
Pensions, retiring allowances, death benefits
Benefits under a supplementary unemployment
benefit plan
Additional amounts that an employer pays while
participating in a job creation program approved by Human Resources Development
Canada.
Canada Revenue Agency provides forms that help employers determine how much income
tax to deduct. Most employees use Form TD1, Personal Tax Credits Return. This form
outlines the credits that employees can claim when filing their income tax returns.
Employees should complete new TD1 forms within seven days of any changes to a
situation that will affect their income tax returns. They do not have to complete new TD1
forms if their personal tax credit amounts have not changed for the year. A completed
TD1 form is required for each employee.
Accounting 20
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Lesson 6
Employees can have more tax deducted from the remuneration they receive in a year. In
order to do this, they must file a new TD1 form that shows how much more tax they want
deducted. This amount stays the same until they file a new TD1 form.
After the employer has determined the “gross” remuneration for the pay period, the
following amounts are subtracted in order to determine the amount of tax to deduct from
the “net” remuneration.




RPP (registered pension plan)
Union dues
Contributions to a retirement compensation arrangement or pension plan
Contributions to a registered retirement savings plan.
For example, Bob is paid weekly (52 pay periods per year) and contributes to a RPP and
pays union dues. To determine how much income tax to deduct from the amounts Bob
receives weekly, his employer has to perform the following calculation.
Salary (weekly)
Plus Taxable Benefits
Gross Remuneration
$500
$ 50
$550
Minus RPP contributions
Minus Union Dues
$ 25
$ 5
$ 30
Amount subject to tax
$520
CPP contributions and EI premiums are not subtracted from the gross remuneration in
order to determine the amount subject to income tax deductions.
In Part A, “Claim codes” of the current Payroll Deductions Tables for Saskatchewan, find
the employee’s claim code for the total claim amount shown on the federal and provincial
TD1 forms. If an employee has not completed a TD1 form, use Claim Code 1. The claim
codes have been removed from the TD1 form, Personal Tax Credits Return. A listing of
the codes is provided in the Payroll Deductions Tables booklet from Canada Revenue
Agency. The tax deductions tables are for weekly, bi-weekly, semi-monthly, and monthly
pay periods. When using the tables, the first step is to determine the amount that is
subject to income tax deductions.
The next step is to go to Part D, “Federal Tax Deductions” and Part E “Provincial Tax
Deductions” and turn to the appropriate table for the pay period. Locate the “Pay” column
on the left and find the income bracket that includes the employee’s remuneration from
which to deduct tax. Then follow the line across to the “Employee’s claim code” column
and find the amount of tax to deduct. The federal and provincial codes might not be the
same. If the federal and provincial tax amounts are found in separate tables, add the two
amounts together and then deduct both amounts form the employee’s pay.
Accounting 20
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Lesson 6
Regular Pay
=
Regular Time x Regular Rate
40 hrs × $8.00
=
$320.00
Overtime Pay
=
Overtime Hours x Overtime Rate
10 hrs × $12.00 (1 1/2 × 8)
=
$120.00
Total Gross Pay
$440.00
Time Keeping Procedures
One requirement of an adequate payroll is to keep an accurate record of the time each
employee has worked. The two most common methods are by using a payroll time sheet or
a payroll time card.
The Payroll Time Sheet
This method involves a supervisor or manager marking on a time sheet the hours worked
by each employee.
The Payroll Time Card
When a business is fairly large, it is more economical to use a time card as the one
illustrated on the next page. When this device is used, each employee records her/his own
time by making use of a machine known as a "punch clock". The employee inserts her/his
card into the punch clock and the time is automatically printed on the card. Upon leaving
the plant, store, or office for lunch or at the end of the day, the procedure is repeated.
Notice that the card contains all the necessary information required to prepare the payroll
register. The card shown here belongs to James Smith, who is employee number 1. The
card gives the date of the week for which the employee is seeking pay. For recording the
time, notice that there are three sections--Morning, Afternoon, and Overtime--with an In
and Out for each section. When Mr. Smith reported for work Monday, he recorded his
arrival time at 8:00 a.m. The other entries on this line indicate that he punched out for
lunch as 12:01, started again at l:00 and that he left for the day at 5:03. On Wednesday
he worked 2 hours overtime.
Accounting 20
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Lesson 6
Insert an example of an Employee’s Time Card
At the end of the week the payroll clerk totalled the number of regular hours worked, as
well as the total number of hours overtime. At the end of each period, the card shows the
hours the employee was at work.
Most businesses have a policy of deducting time for coming to work late. Usually an
employee will lose 15 minutes for each 15 minutes or any portion of 15 minutes that he is
late. For instance, if Mr. Saks clocked in at 8:07 on Monday morning instead of 8:00, he
would lose 15 minutes for the morning session. He would only be given credit for working
7¾ hours for the day. On the other hand, if he clocked in at 8:16, he would lose ½ hour in
the morning and he would only be credited with a 7½ hour day. For the purposes of this
course, employees will not be deducted pay for coming to work late unless they exceed 5
minutes.
Accounting 20
19
Lesson 6
The Payroll Register
Once the time cards are prepared, they can be entered into what is known as a Payroll
Register. The Payroll Register is a form on which the entire payroll is recorded. The
deductions include Income Tax, CPP, Employment Insurance, Union Dues and RPP.
Union Dues (U) - the employees of many businesses are organized in labour unions.
Unions dues are often deducted by the employer and paid periodically to the union. The
obligation of the employer is usually part of the contract negotiated between the employer
and the employees’ union. The amount that is deducted from the employees’ pay is set by
the union.
Registered Pension Plan Deduction (RPP) - employees are often enrolled in private
"registered" pension plans through their workplaces. A RPP is a private pension plan
approved by the government for income tax purposes. The amount paid into a registered
plan (up to an allowed limit) may be deducted by the employees when calculating their
income taxes. Usually both the employee and the employer contribute an amount which is
a set percentage of the employee’s gross pay.
When all deductions are subtracted from gross pay, the net pay figure can be calculated.
The employees may be listed in the register in several ways. They may be entered
alphabetically; according to an assigned employee number, salary or in order of seniority.
Notice that each column of the register is totalled and serves as a basis for journal entries
required to record the payment of salaries.
Accounting 20
20
Lesson 6
Calculating Deductions on the Payroll Register
The deduction section of the payroll register is used to record the various amounts that
must be withheld from employees’ earnings. Other types of deductions could occur and
vary from company to company. Examples of these may be extended health care, a dental
plan, the United Way, Canada Savings Bonds, and group life insurance.
Weekly, bi-weekly, semi-monthly and monthly tables for Income Tax, CPP and EI are
provided in the Payroll Deductions Tables to meet your assignment needs. See if you can
do the deductions for each of the five employees.
Note: Our first electrician in the Payroll Register, John Arthur, is married. He claims his
wife as a dependent and according to his TD1 form, he should fall into net claim
code 5. His gross salary for the week was $480.00. Mr. Arthur’s Union Dues came
to $9.00 and his RPP deductions amounted to $48.00. His CPP, EI/UI and Income
Tax deductions are calculated as follows:
Employment Insurance and Canada Pension Plan Deductions

Turn to the Payroll Deductions Tables, effective January 1, 2006, Employment
Insurance Premiums Section. Locate John Arthur’s gross salary of $480.00 in the
appropriate interval. The correct interval is 479.95 - 480.48. The deduction for this
interval amounts to $8.98.

Turn to the CPP Weekly section. $480.00 falls in the interval 479.93 - 480.12. The
deduction in this case amounts to $20.43.
Income Tax Deduction
As was mentioned above, John Arthur is married and his exemptions place him in Net
Claim Code 5.

Turn to the Weekly Federal and Provincial Tax Deduction sections.

The taxable income figure required to determine the income tax in the income tax
tables is based on John Arthur’s Total Earnings less Union Dues (U) and his
Registered Pension Plan (RPP). Union dues and RPP amounts are usually a
percentage of salary but are predetermined here for convenience sake. The taxable
amount would be ($480.00 - Union Dues, $9.00 - RPP, $48.00) = $423.00.
Accounting 20
21
Lesson 6
This taxable figure of $423.00 is found in the federal tax table in the interval 419 - 423.
Moving across the page to net claim code 5 the amount $19.45 represents the amount of
federal income tax that would be taken off this pay period.
Next, this taxable figure of $423.00 is found in the provincial tax table in the interval
420-424. Moving across the page to net claim code 5, the amount $13.85 represents the
amount of provincial income tax that would be taken off this pay period. Therefore, John
Arthur’s total tax deduction is $33.30 ($19.45 + $13.85).
Remember:
To determine the taxable income figure, subtract Union Dues and
Registered Pension Plan from Total Earnings. Then deduct both
federal and provincial income tax.
Completing the Payroll Register
Once the deductions are entered on the Payroll Register, the net pay for each employee is
calculated. The net pay is found by totalling the deductions and subtracting them from
gross pay.
The next step is to total all the columns of the Payroll Register. Check to ensure that the
net pay plus the total deductions are equal to the gross earnings. Then, rule the Payroll
Register with a double line.
Before each cheque is written for the amount of the net pay, someone in authority must
check the payroll computations and approve the payroll. Notice that after a cheque is
written, the cheque number is recorded in the Ch. No. column.
The payroll register is the source document for payroll journal entries which will be
discussed in the next lesson.
The Earnings Record
A business form which summarizes all the details of payment made to employees is called
an employee’s earnings record. The employee’s earnings record is recorded after each pay
period from the payroll register. The record is usually prepared on quarterly cards and
shows employees’ gross earnings, deductions and net pay. An illustration follows:
Accounting 20
22
Lesson 6
Insert an example of Earnings Record form
A few things to note about the Earnings Records are:

The CPP to Date column is cumulative. As an example, in the second week the
amount is added to the previous week and so on.

The "CPP to Date" column is not added to the total either horizontally or vertically.

Accumulated Earnings is a cumulative column. The Total Earnings is added to the
previous balance each time to give a current balance.

Registered Pension Plan and Union Dues are not included in this example because
here we are assuming that the claim for Union Dues and the RPP will be claimed as
credits when Joann Boyd prepares her Income Tax Return in the spring.
Paying the Payroll
Businesses differ in the method used to pay their employees. They have the option of
paying employees either by cash or cheque. Payment by cash is very seldom used so it will
not be presented here.
The Payroll Bank Account
When a company pays a large number of employees by cheque, it is desirable to open a
special payroll bank account. On each payday a cheque on the regular company bank
account is drawn and deposited in the payroll bank account. Individual cheques for the
employees are then drawn on this special account, which is thus immediately exhausted.
At the end of a pay period, the cheque that the company deposits in the special payroll
account is equal in amount to the net pay.
Many financial institutions offer a payroll service where the employees’ net pay is
transferred electronically into their bank accounts. The employer transfers the net
amount of the payroll to the institution along with the employees’ names and the amounts
to be credited.
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Lesson 6
When a company uses a special payroll bank account, it must complete the following steps
in order to pay its employees.

Record the information shown on the Payroll Register with a General Journal
entry. This entry causes the sum of the employees’ net pay to be credited to the
liability account (Salaries Payable).

Have a single cheque written that is payable to the Payroll Bank account for the
total amount of the payroll and enter the payment in the Cheque Register; this
requires a DR to Salaries Payable and a CR to Cash.

Have the cheque deposited in the payroll bank account. This transfers an amount
of money equal to the payroll total from the regular bank account to the special
payroll bank account.

Have individual payroll cheques drawn on the special payroll bank account and
delivered to the employees. Then employees cash their cheques, the funds in the
special account will be exhausted.
Remember These Important Points

All employees must have a card which contains a social insurance number (SIN).
Canada Pension Plan and Employment Insurance premiums are recorded under
this number.

The TD1 Form (Personal Tax Credit Return) is the first income tax form normally
completed by employees at the start of a new job. The employer uses this form to
determine the amount of income tax that should be deducted from an employee’s
pay.

Once an employee’s salary and pay period are established, this information and
other important employee data are recorded in the top portion of an employee’s
individual earnings record.

After an employee’s gross pay is calculated, payroll accounting must determine and
then subtract the deductions from gross pay. This leaves an employee with net pay.
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Lesson 6

Employers must deduct the required Canada Pension Plan (CPP) contribution from
the remuneration of every employee who is 18 years of age and has not reached 70
years of age.

The employer must match the amount deducted for CPP from the employee’s salary.

All employees, except those specifically exempted, are subject to a deduction from
pay for employment insurance (EI).

The employer is required to make a contribution for EI on behalf of employees equal
to 1.4 times the amount withheld from the employee.

The federal Income Tax Act makes it compulsory for employers to deduct the
applicable income tax from the wages or salaries of employees.

To find out how much a payroll clerk should deduct from each employee for income
tax, check the employee’s net claim code on the TD1 form.

A wage earner’s pay is determined by multiplying her/his pay rate by the total
number of hours worked in the pay period. In addition, overtime pay (1 1/2 times
the basic hourly rate) is allowed for any hours worked beyond regular hours.

After calculating the details of gross earnings, deductions and the net pay for each
employee for a particular payroll period, the complete payroll is summarized in an
accounting record called the payroll summary or payroll register.

Compulsory deductions are required by the government in the form of Income Tax,
Canada Pension Plan, and Employment Insurance.

Non-compulsory deductions may not be compulsory by the government, but may be
compulsory deductions by employer policy. There are numerous non-compulsory
deductions such as group insurance plans and bonds that vary from employer to
employer.

A business form which summarizes all the details of payment made to employees is
called an employee’s earnings record. The record is recorded after each pay period
from the payroll register, and it is usually prepared on quarterly cards. The
earnings record shows employees’ gross earnings, deductions and net pay.
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Lesson 6
Do You Understand?
Basic personal amount - a tax credit available to all taxpayers.
Canada Pension Plan (CPP) – provides income for an employee’s retirement.
Contributions are directly related to annual earnings.
EI premiums – employees who receive a salary must pay these premiums to their
employer. When an employee becomes unemployed, she/he is entitled to Employment
Insurance benefits.
Employee’s gross pay – the amount an employee earns before any deductions for taxes or
other items, such as union dues or insurance premiums.
Employee’s individual earnings record - a payroll record showing an individual
employee’s payroll details for each pay period. It includes the employee’s working time,
gross earnings, deductions, and net pay.
Employee’s net pay – the amount an employee is paid, determined by subtracting from
the gross pay all deductions for taxes and other items that are withheld from the
employee’s earnings.
Employment Insurance (EI) – an employee/employer financed employment insurance
plan.
Income tax – employers deduct income tax from the salary or wages of their employees
and remit these amounts to Canada Revenue Agency. More than 80% of all personal
income tax is paid this way.
Insurable earnings - the amount of earnings upon which EI premiums are calculated.
Pay period - the period covered by the wage or salary payment.
Payroll - a list of employees that shows payments due them for a pay period.
Payroll bank account – a special bank account a company uses solely for the purpose of
paying employees by depositing in the account each pay period an amount equal to the
total employees’ net pay and drawing the employees’ payroll cheques on that account.
Payroll deduction - an amount deducted from an employee’s pay, based on the amount of
an employee’s gross pay.
Payroll register - an accounting record summarizing the details of a pay period, such as
the total hours worked for each pay period.
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Lesson 6
Payroll time card – a card issued to each employee that the employee inserts in a time
clock to record the time of arrival and departure to and from work.
Pensionable employment - employment for which CPP contributions are required.
Personal tax credits – amounts of money considered to have been paid towards an
individual’s tax payable. Examples are provincial tax credits or dividend tax credits.
Record of employment - a key document proving work in insurable employment.
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Lesson 6
Conclusion
All employers are required by law to withhold certain amounts from their employees’
paycheques.
All employees must pay Income Tax and make Canada Pension Plan and Employment
Insurance contributions.
Many employees have further deductions for various other items. These can be for the
purchase of Canada Savings Bonds, various health schemes and many other benefits.
Each business will have a system for handling payroll accounting.
You will require a current Payroll Deductions Tables booklet in order to do your selftesting and assignment questions that follow
`
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Lesson 6
Self Test
Question 1
Using the weekly Payroll Deductions Tables booklet given to you, calculate the
contributions for each of the following gross weekly salaries:
Gross Salary
Net Claim Code
CPP Contribution
EI Premium
(a) $405.00
1
___________________
_______________
(b) $382.50
2
___________________
_______________
(c) $358.65
5
___________________
_______________
(d) $598.99
4
___________________
_______________
Question 2
Using the weekly income tax tables given, calculate the federal and the provincial income
tax payable in the above four cases.
Federal Income
Tax Payable 2009
Provincial Income
Tax Payable 2009
Total Tax Payable
(a)
__________________
__________________
__________________
(b)
__________________
__________________
__________________
(c)
__________________
__________________
__________________
(d)
__________________
__________________
__________________
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Lesson 6
Answers for Self Test
**** Need to fill in the correct answers for 2009
Question 1
CPP Contribution
2009
EI Premium
2009
(a)
Question 2
Federal Income
Tax Payable 2009
Provincial Income
Tax Payable 2009
Total Tax Payable
(a)
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Lesson 6