One of payroll’s fundamental responsibilities is to ensure employees are paid accurately. Such pay can’t be accurate, if the amounts being deducted for income tax, CPP or EI aren’t correct. As a result, checking source deduction accuracy should be part of all good payroll system implementation plans. Similarly, it’s a best practice to verify source deduction accuracy every time your payroll system is updated for changes to income tax rates, tax brackets or TD1, CPP or EI amounts.
The most common tool used to verify the accuracy of CRA source deductions is the CRA’s own Payroll Deductions Online Calculator, PDOC. As well, there are at least 3 other similar (i.e. free) tools also available:
- The online payroll calculator from Simplepay;
- The payroll deductions online calculator from Payment Evolution; and
- WebTOD from Middle Earth Technologies.
There are pros and cons for each of these 4 tools.
The primary advantage of PDOC is that it’s provided by the CRA itself. If you are trying to check the accuracy of CRA source deductions, it’s more than a reasonable assumption you may rely on the CRA’s own tool. However, one limitation of PDOC is that it does not calculate provincial income tax amounts for Québec. To do this, PDOC must be combined with Revenu Québec’s own payroll calculator, WinRas, available only for installation on computers running Microsoft’s Windows operating systems. Having to use both of these tools means significantly more effort is required. By contrast, the 3 other payroll calculators listed above integrate CRA and Revenu Québec requirements, so that source deductions for any jurisdiction can be validated in a single go.
It’s also a fair comment that these 3 other tools are in some aspects easier to use than PDOC. PDOC is structured as a series of pages that must be stepped through in sequence. This might not seem important, but if you are trying to validate more than just a few entries, stepping through a series of pages that must each load separately noticeably slows down data entry. The other online calculators listed above consolidate all data entry onto a single web page, either in a single data entry screen or through multiple screens, accessed from pre-loaded tabs.
The primary advantage of Payment Evolution’s online tool is that it correctly calculates the source deductions required on gross ups (hint: check the ‘Net Pay’ box). Sometimes employers will specify bonuses to be paid as a specific net-pay amount. This means literally starting with after-tax net pay and working back to pre-tax gross income. Few payroll systems provide this functionality. As a result, where gross ups are required, a common solution is to build a homegrown source deduction calculator in Excel. However, that is easier said than done and requires particular skill in Excel, as well as careful knowledge of the T4127 guide.
Despite the obvious benefits, there are some situations where the tools listed above can’t be used to validate CRA or Revenu Québec income tax calculations. You would think there would be only one ‘right’ way to calculate income tax. Unfortunately, it’s not quite as simple as that, since the T4127 guide and its Revenu Québec equivalent, the TP-1015.F guide, provide software developers with several different options in how to apply the source deduction logic required.
Here we aren’t talking about the different income tax methods available, i.e. the periodic, bonus, lump-sum and TD1X methods. Instead, we are discussing options within the default, periodic logic. In order to understand these options, you have to have a basic grasp of this logic’s overall structure:
- Income tax calculations generally start with pay period inputs;
- These pay period inputs are converted to an annual basis;
- Annual income tax owing is calculated; and
- This annual tax is converted back to a pay period basis.
The default logic for converting between the pay period and year, in steps 2 and 4, is based on the count of tax-year pay periods, based on pay date. For example, if an employee’s semi-monthly taxable income is $4,000 in step 1, then annual taxable income in step 2 is $96,000 ($4,000 times 24 periods).
Other options made available by the CRA and Revenu Québec, share the annual tax calculations in step 3, but differ in how pay period amounts are converted to and from the year. For example, if:
- Current pay is the 10th out of 26 for the year;
- Current period taxable income is $4,000; and
- The YTD sum of taxable income for the prior 9 pay periods is $25,000,
annual taxable income under CRA cumulative averaging (also termed Option 2) is $93,000 ($25,000 plus 17 times $4,000. Note, if the current pay period is 10, there are 17 pays remaining in the year, including the current one).
Doing this calculation requires data values that PDOC doesn’t track, so if your payroll software uses cumulative averaging, you won’t be able to verify the results with PDOC – or any of the other tools listed above.
Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at firstname.lastname@example.org, (250) 228-5280 or visit www.alanrmcewen.com for more information.