# Basic payroll question - input, please!



## MoneyGal (Apr 24, 2009)

Hi peeps: Can someone explain this issue to me? 

My question is about how mandatory payroll deductions (i.e., CPP, EI) work. If I look at a payroll deductions calculator (like the one at Walter Harder, for example), for a given salary amount and pay period frequency I get results like "CPP premiums paid in 9 pay periods." 

In practice, does that mean that peoples' CPP is deducted at some *high* amount such that their take-home pay gets *increased* partway through the year?

Or, in practice, are those deductions spread out through the year by the payroll company, so that the employee's take-home pay remains constant?

Thanks!


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## LondonHomes (Dec 29, 2010)

Insurable earning for CPP for 2011 are 48,300 which means you only pay CPP on this amount which works out to $2,217.60 for this year. Once an employee has paid their yearly max amount to the government they do not need to pay any more for the rest of the year, so their pay cheque will increase at the end of the year. 

Only to be reduced again the following January, which is why you rarely feel it when the government actually reduces income tax rates.

EI works the same way.


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## CanadianCapitalist (Mar 31, 2009)

MoneyGal said:


> Hi peeps: Can someone explain this issue to me?
> 
> My question is about how mandatory payroll deductions (i.e., CPP, EI) work. If I look at a payroll deductions calculator (like the one at Walter Harder, for example), for a given salary amount and pay period frequency I get results like "CPP premiums paid in 9 pay periods."
> 
> ...


Since CPP and EI are only paid on a certain maximum amount every year, if your salary exceeds the maximum, you'll only pay CPP and EI for the period that your YTD pay has not exceeded these amounts.

Example. The CPP YMPE this year is $48,300. If your pay is less, say $45,000 you'll have CPP deductions throughout the year.

If your salary is higher, say $72,450, you'll pay into CPP for the first 8 months to the tune of $284. After that, your take-home pay will get a boost by that amount.

It's possible to guess approx. how much someone makes if you reveal when your CPP contributions end and you know the frequency of pay checks


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## Dana (Nov 17, 2009)

We go out for dinner to celebrate "tax free day": the day that my husband has maxed his CPP and EI deductions for the year. For the remainder of the year we have several hundred extra dollars each pay period. 

He came home bummed this week with his first 2011 paystub because of the reduced net due to CPP/EI deductions.


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## brad (May 22, 2009)

Dana said:


> He came home bummed this week with his first 2011 paystub because of the reduced net due to CPP/EI deductions.


Even worse, my annual raises always used to take effect in January, but my take-home pay in January was actually lower than it had been in December, even when I got a raise, due to the CPP/EI deductions starting up again in January.


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## Four Pillars (Apr 5, 2009)

It always seemed silly to me that the gov't won't allow payroll departments to spread the EI and CPP throughout the year. However, I guess they want to guarantee the premiums owed in case you stop working during the year.

Another oddity - If you start at a new company during the year, your EI and CPP premiums "start over". So if you make $100k and switch jobs mid-year - you can end up paying double EI and CPP premiums for that year.

Of course, the extra money will be returned to you at tax time, but it seems a bit dumb.


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## MoneyGal (Apr 24, 2009)

Thanks people! I know how we do things at my company but I didn't know whether that was just our internal practice, or what the rules are from a CRA point of view...and my quick googling was ineffective. 

(I actually thought other companies might spread the deductions out over the year.)


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## andrewf (Mar 1, 2010)

Yes. Our tax collection system is a bit dim. Same goes for my bonus, paid in March. I end up loaning half of it to the government for ~13-14 months until I get my refund. Booo. It's taxed as though my annual salary was my biweekly pay + bonus x 26, usually triple to quadruple my normal paycheque.


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## Dana (Nov 17, 2009)

brad said:


> Even worse, my annual raises always used to take effect in January, but my take-home pay in January was actually lower than it had been in December, even when I got a raise, due to the CPP/EI deductions starting up again in January.


That Sucks!


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## the-royal-mail (Dec 11, 2009)

I would rather these expenses NOT be spread through the year. As one poster noted above, tax-free day is a time of celebration and enjoyment of having more take-home pay.

I have never worked in a company which spreads these payments out over an entire calendar year, thank God.


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## brad (May 22, 2009)

the-royal-mail said:


> I would rather these expenses NOT be spread through the year. As one poster noted above, tax-free day is a time of celebration and enjoyment of having more take-home pay.


While I appreciate the psychological advantage, I think most of us would benefit from having smaller withholdings from each paycheque spread out evenly over the year: apart from making it easier to project your cash flow it might also help people save/invest more throughout the year instead of concentrating their savings and investing toward the end of the year. 

I know that in my own case, I end up investing and saving less during the months that EI and CPP are withheld from my paycheque than I do during the months when they're not. For investments, this probably has an effect on my ability to take advantage of dollar-cost averaging, for example.


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## jamesbe (May 8, 2010)

I always look forward to property tax free day! Our city does 10 equal payments which means for 2 months I'm flush with some extra cash, great for those 2 holiday months Nov/Dec.


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## Plugging Along (Jan 3, 2011)

MoneyGal said:


> Thanks people! I know how we do things at my company but I didn't know whether that was just our internal practice, or what the rules are from a CRA point of view...and my quick googling was ineffective.
> 
> (I actually thought other companies might spread the deductions out over the year.)


Based on what our accountant told us, you have to pay out the amount, early on, and cannot spread it through out the year. I'm sorry, I can't remember the rationale, nor do I have a link, it was just something our accountant told us.


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## OhGreatGuru (May 24, 2009)

Four Pillars said:


> It always seemed silly to me that the gov't won't allow payroll departments to spread the EI and CPP throughout the year. However, I guess they want to guarantee the premiums owed in case you stop working during the year.
> 
> ...
> 
> .


Precisely. CPP is premiums are based on a certain percentage of weekly/monthly earnings, up to a maximum yearly level. If your salary was $100k, and your employer spread your premiums over a year as you suggest; and you quit or were fired halfway through the year, or were in a seasonal occupation, neither you nor your employer would have paid the premiums owed on the first $50K of salary.


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## MoneyGal (Apr 24, 2009)

OhGreatGuru said:


> Precisely. CPP is premiums are based on a certain percentage of weekly/monthly earnings, up to a maximum yearly level. If your salary was $100k, and your employer spread your premiums over a year as you suggest; and you quit or were fired halfway through the year, or were in a seasonal occupation, neither you nor your employer would have paid the premiums owed on the first $50K of salary.


Not disagreeing with you, but with the premise for this: doesn't it make just as much sense to have a CPP premium *owing* in that case (just like a tax bill due), as opposed to "overcharging" for some months? 

Why would a CPP or EI bill owing be any different from a tax bill owing? Instead, we get the result that CPP premiums are frequently *overpaid* and are never underpaid. 

Just musing.


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## Four Pillars (Apr 5, 2009)

MoneyGal said:


> Not disagreeing with you, but with the premise for this: doesn't it make just as much sense to have a CPP premium *owing* in that case (just like a tax bill due), as opposed to "overcharging" for some months?
> 
> Why would a CPP or EI bill owing be any different from a tax bill owing? Instead, we get the result that CPP premiums are frequently *overpaid* and are never underpaid.
> 
> Just musing.


Good point. What I find interesting is that it is very easy to have your withholding tax lowered (TD1 form I think), which helps if you are making post-tax RRSP contributions or have other factors which will lower your eventual tax bill. But you can't do the same thing with CPP and EI. 

Oh well - not a big deal.


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## Eclectic12 (Oct 20, 2010)

MoneyGal said:


> Not disagreeing with you, but with the premise for this: doesn't it make just as much sense to have a CPP premium *owing* in that case (just like a tax bill due), as opposed to "overcharging" for some months?
> 
> Why would a CPP or EI bill owing be any different from a tax bill owing? Instead, we get the result that CPP premiums are frequently *overpaid* and are never underpaid.
> 
> Just musing.


I'd guess it's along the lines of why some people have to pay their income tax in quarterly installments instead of the end-of-the-year type.

Then too, if the money is forwarded and put to work right away, it should produce more income for the play. Similar to the advice to make RRSP contributions as early as possible instead of waiting until a year + later.


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## Berubeland (Sep 6, 2009)

The joys of self employment


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## OhGreatGuru (May 24, 2009)

MoneyGal said:


> Not disagreeing with you, but with the premise for this: doesn't it make just as much sense to have a CPP premium *owing* in that case (just like a tax bill due), as opposed to "overcharging" for some months?
> 
> Why would a CPP or EI bill owing be any different from a tax bill owing? Instead, we get the result that CPP premiums are frequently *overpaid* and are never underpaid.
> 
> Just musing.


For a self-employed person it's not a problem, because they work out their CPP bill at income tax time. But imagine the accounting fun employers and CRA will have trying to keep track of what they owe for all those fomer employees; plus it reduces cash-flow to CPP fund; plus it places onus on CRA to collect it (nearly a year late), instead of getting automatically paid up front.

What you are saying is the rest of the taxpayers should pick up the cost for a 6-12 month delay in paying premiums owing to CPP fund.


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## MoneyGal (Apr 24, 2009)

OhGreatGuru said:


> What you are saying is the rest of the taxpayers should pick up the cost for a 6-12 month delay in paying premiums owing to CPP fund.


[shrug] How is this different from saying that there should NEVER be any taxes owing, because then "the rest of the taxpayers" are picking up the cost of those owed taxes? 

CPP premiums max out at just over $700. This is a relatively small amount. Unpaid and owing taxes are, I wager, a MUCH bigger deal than the potentially underpaid CPP contributions associated with someone leaving a job partway through a calendar year, and having their CPP deductions re-start at zero at a new employer. To how many people can this possibly apply anyways?


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