Clarifying bonuses for temporary, partial-year employees
QUESTION: We are giving bonuses to partial-year employees for some temporary work that they did. These employees earned very little — about $3,000 — while working for us. Do we still use the bonus method* to calculate the amount of income tax to deduct?
ANSWER: Whether an employer must use the bonus method to calculate income tax deductions depends on the employee’s total annual earnings.
If the employee’s total earnings for the year, including the bonus, do not exceed $5,000, do not use the bonus method. Instead, deduct 15 per cent (10 per cent in Quebec) from the bonus payment for income tax. Use the bonus method if the total annual earnings are more than $5,000.
When calculating total annual earnings, subtract the following deductions:
• employee’s contribution to a registered pension plan, subject to annual maximums
• union dues
• employee’s RRSP contribution deducted at source, subject to personal RRSP limits, as long as the employer has reasonable grounds to believe that the employee can deduct the amount of the contribution for the year
• employee’s pooled registered pension plan contribution, as long as the employer has reasonable grounds to believe that the employee can deduct the amount of the contribution for the year
• employee’s contribution to a retirement compensation arrangement
• deduction for living in a prescribed zone as per the federal TD1 form
• other amounts that the CRA authorizes in writing.
For Quebec provincial income tax purposes, if the employee’s total earnings for 2016, including bonuses and retroactive pay, do not exceed $14,450, do not use the bonus method. Instead, deduct eight per cent provincial income tax. Use the bonus method if the total annual earnings are more than $14,450.
In addition to income tax deductions, bonus payments are subject to Canada/Quebec Pension Plan (C/QPP) contributions and Employment Insurance (EI) and Quebec Parental Insurance Plan (QPIP) premiums.
*Note: The bonus method is a formula used to calculate the amount of income tax to deduct from a bonus, incentive or award. The formula is T = P (B – A), where:
T = Income tax due on bonus, incentive, or award
P = Number of pay periods in a year
A = Tax on usual earnings for the pay period
B = Tax on usual earnings for the pay period, plus the amount of the bonus (incentive or award) divided by the number of pay periods in the year
Understanding source deductions on vacation pay for deceased employees
QUESTION: One of our employees recently died. He had not used the vacation time he had earned for the year so we are paying it out to his estate in a lump sum. Do we deduct source deductions from this payment or is it considered a death benefit?
ANSWER: No, it is not a death benefit. Death benefits are discretionary payments usually made to recognize a deceased employee’s service. Vacation pay is a legislated requirement.
The payment of unused vacation pay is regular employment income and is subject to normal deductions for C/QPP contributions and income tax. The payment is not subject to EI or QPIP premiums.
In Quebec, the payment of unused vacation pay is also included when calculating employer contributions to the Health Services Fund and the labour standards levy, as well as in determining the employer’s participation in the Quebec Workforce Skills Development and Recognition Fund.
The payment of the unused vacation pay can be made “To the Estate of the late...” and is reported in box 14 of the T4 and box A of the RL-1.
Understanding source deductions and workers’ compensation top-ups
QUESTION: We have agreed to top up an employee’s workers’ compensation benefits. Do we have to take source deductions from the top-up amount?
ANSWER: The Canada Revenue Agency considers top-ups to be payments that employers make to employees in addition to their workers’ compensation benefits after a workers’ compensation board accepts a worker’s claim.
Top-up payments are subject to CPP contributions and income tax source deductions, but not EI premiums. Report the top-ups on the employee’s T4 at year end.
Amounts employers pay to employees in addition to an advance or a loan while an employee is awaiting a workers’ compensation board ruling on a claim are not top-up payments.
They are employment income and are subject to CPP contributions, EI premiums and income tax deductions. The employer must report these amounts on the employee’s T4 at year end.
For employers in Quebec, top-up payments paid after the Commission des normes, de l’équité, de la santé et de la sécurité du travail has accepted an employee’s claim are subject to QPP contributions and provincial income tax, as well as employer contributions to the Health Services Fund, labour standards levy and the Workforce Skills Development and Recognition Fund.
They are not subject to premiums for the Quebec Parental Insurance Plan. Employers must report top-up payments on an employee’s RL-1 at year end.
Annie Chong is the manager of Carswell’s payroll consulting group, and can be reached at [email protected] | (416) 298-5085.
