5A. Appendix: Payroll Deductions and Liabilities

Jacqueline Gagnon

5A. Appendix: Payroll Deductions and Liabilities

Payroll Deductions and Liabilities

Jacqueline Gagnon

A lightbulb brain in a circle—the 'think' section of the think-see-do approach.

The focus of chapter 5 was accruals, so we made a simplification when accrued salaries were paid. We did not account for employment deductions. Let’s remedy that simplification here.

When employees are paid, they do not receive their gross payGross Pay:
Calculated as the number of hours worked multiplied by hourly pay. Gross pay is recorded on an employee’s T4 as annual taxable employment income.. Gross pay calculated as the number of hours worked times an employee’s hourly rate. For example, an employee that is paid ^$20⁄_hour works 60 hours in the current biweekly payroll period. This employee’s gross pay is $1,200, calculated as 60 hours × ^$20⁄_hour. The employee won’t see $1,200 deposited in their bank account though. Instead the employee will receive a lower amount: net payNet Pay:
The amount of cash received by an employee for their work. Net pay is calculated as gross pay less amounts withheld for income taxes, union dues, Canada Pension Plan (CPP), Employment Insurance (EI) and other deductions. To contrast, see Gross pay.. Net pay is calculated as gross pay less employment deductions. The following items may be subtracted from an employee’s paycheque to arrive at net pay:

Deduction from Employee Paycheque	Submitted to
Employee’s portion of employment insurance (EI)	CRA
Employee’s portion of Canada Pension Plan (CPP) contribution	CRA
Employee income tax withheld	CRA
Union dues	Employee union
Employee portion of pension contribution	Employee pension plan
Charitable contributions	Charity of the employee’s choice, United Way for example

The company transfers net pay into employees’ bank accounts. The company will send deductions to the Canada Revenue Agency (CRA) on behalf of their employees for EI, CPP, and income tax withheld; and to the employee union for union dues.

An eye in a circle—the 'see' section of the think-see-do approach.

Let’s look at an example of gross versus net pay from the employer’s perspective.

My Turn:: EmployerA employs five manual labourers at $25 per hour and one full-time salaried employee at $2,500 biweekly. At the end of the current biweekly payroll period, each of the five labourers worked 60 hours. EI is deducted at 1.63% of gross pay, CPP is deducted at 5.95%, and income tax is withheld at 22%.
Required:: Calculate employee deductions and prepare a journal entry to record payroll for the current period.

Gross Salaries and Wages:

$\begin{equation*} \begin{aligned} \;&\;\Biggl({60\text{ hrs}\atop\text{per employee}}\times{5\atop \text{employees}}\times\dfrac{\$\,25}{\text{hour}}\Biggr)&+\;\$\,2,500 \\ \, \\ \;&=\;\$\,7,500&+\;\$\,2,500 \\ \, \\ \;&=\;\mathbf{\$\,10,000}\textbf{ Gross Pay} \\ \end{aligned} \end{equation*}$

Deduction Name	Total Gross Pay	Deduction Rate	Total Deduction
EI deduction:	$ 10,000	× 1.63%	= $ 163
CPP deduction:	$ 10,000	× 5.95%	= $ 595
Income tax withheld:	$ 10,000	× 22%	= $ 2,200

Net Salaries and Wages:

$\begin{equation*} \begin{aligned} &\;\$\,10,000\;-\;\$\,163\;-\;\$\,595\;-\;\$\,2,200 \\ \, \\ \;&=\;\mathbf{\$\,7\,042}\textbf{ Net Pay} \\ \end{aligned} \end{equation*}$

(to record salaries and wages paid to employees)
DR		Salaries and Wages Expense	10,000
	CR	Cash		7,042
	CR	EI Payable		163
	CR	CPP Payable		595
	CR	Employee Income Tax Payable		2,200

Notice that salaries and wages expense is gross pay. The company will pay the full $10,000 expense, but only $6,242 is paid to employees. The rest is paid to CRA on behalf of the employees.

A gear and a pencil in a circle—the 'do' section of the think-see-do approach.

Now you try! Here is an exercise for you to practice payroll.

Your Turn:5A—1: Employer B

Solution:5A—1: Solution

And one more for good measure 😊

Your Turn:5A—2: Employer C

Solution:5A—2: Solution

Well done. Thanks for working through payroll with me! Great progress!

5A. Appendix: Payroll Deductions and Liabilities

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