Payroll tax vs. income tax: The difference in Canada

Payroll tax vs. income tax: What’s the difference?

The difference between payroll taxes and income taxes is a matter of context. Collectively, they both fall under the umbrella of payroll taxes (source deductions). Payroll taxes are dollar amounts that are either taken out or added to a paycheque, depending on the tax itself and the rules that apply to the specific tax. Here’s a quick breakdown of payroll taxes and income taxes. 

What are payroll taxes?

The main Canadian payroll taxes, also known as source deductions, include:

• The Canada Pension Plan (CPP)/Québec Pension Plan (QPP) — Employee and employer contributions. 
• Employment Insurance (EI) — Employee and employer contributions. 
• Federal and provincial/territorial income taxes — Employee contributions. 

For a full overview of payroll taxes and how they work, check out this article. 

What are income taxes?

While CPP/QPP and EI are very specific federal social assistance programs, federal and provincial/territorial income taxes cover things like healthcare, schools, roads, and more. 

What are your responsibilities as an employer?

There’s actually a bit of a lifecycle for payroll taxes that starts from the moment you hire an employee. 

When you hire an employee, employers must:

• Have employees complete a TD1 that captures any relevant income tax credits. 
• Verify the employee's Social Insurance Number and eligibility to work in Canada.
• Report all new hires to the CRA. 

With each pay run, employers must:

• Take out or add in the employee and employer’s contributions. 
• Document these amounts in the employee’s pay stub. 
• Keep a running total of the overall amounts for the business itself. 

According to your payroll remittance schedule, employers must:

Report and forward payroll and income tax amounts to the Canada Revenue Agency (CRA) or Revenu Québec (RQ). 

By the last business day in February of the following calendar year:

Provide each employee with an accurate T4 that includes all of the CPP/QPP, EI and income tax amounts from the previous year. 

Keep records for the current payroll year and six years following:

Payroll records can be either physical paper records or electronic files. 

Report your total payroll amounts on your business income tax return:

You guessed it: This happens every year at tax time. 

How can Huumans help? 

First, we can break down topics like this. But we’ve also got Huumans Payroll, a tool that takes care of your payroll and income tax responsibilities as part of automating and streamlining payroll for you. Learn more and find out how you can pay up to five employees for free for the first year. 

Resources

For more on small business payroll, see these resources:

From the Huumans blog

• What payroll taxes are and how they work
• How payroll remittance schedules work
• How T4s work
• Your small business payroll software checklist

From the CRA

• Employers’ Guide – Payroll Deductions and Remittances
• Payroll Deductions Tables
• Payroll Deductions Online Calculator

FAQs

Is income tax part of payroll taxes?

Yes. The most common payroll taxes include CPP/QPP, EI, and income tax. In Canada, you also need to account for both federal and provincial/territorial income tax.

How do I calculate payroll taxes in Canada?

Use CRA tables, the Payroll Deductions Online Calculator (PDOC), or payroll software, like Huumans. Automating manual calculations saves you time and helps prevent mistakes.

What happens if I get it wrong?

Late or incorrect remittances can lead to penalties and interest charges. Mistakes on paycheques also cause stress for both you and your employees. At the end of the year, payroll tax amounts are reported via mandatory T4s, T4As, and RL-1s.

At Huumans, we want to be helpful and accurate, but we also want to be upfront. This blog helps you make sense of payroll — it doesn’t replace your accountant, bookkeeper, or lawyer. We do our best to keep things accurate, but if you catch something off, let us know and we’ll fix it. And if we link to other sites, that’s just us sharing resources — what they say is on them, not us.