Unit 8 Income tax Flashcards Preview

Payroll 2 > Unit 8 Income tax > Flashcards

Flashcards in Unit 8 Income tax Deck (46):

What does income tax include

federal and provincial taxes


Who do you remit income tax deductions to

they are remitted to CRA


What are the income taxes based on

the province of the employee`s employment rather than the province where they live


what year did the government pass legislation which enabled them to levy a tax on personal income

July 1917


what was the original purpose of personal income tax

help finance government for world war 1


how was income tax collect originally

people were responsible for paying for their own personal taxes directly to the government


what year was it mandatory to have income tax deducted directly off the employee`s payÉ



what is income tax base on

employee's net taxable income


what is included in net taxable income

salary, wages, commissions, bonuses, vacation pay, pensions, retiring allowances, death benefits, the values of any taxable benefits and the values of any taxable allowances


how is income tax reduced

when employee makes contributions to an RRSP , Registered pension plan, union dues, a deduction for living in a prescribed zone and any other deductions authorized by CRA (deduct these amounts from gross income before calculating the tax)


when first hired an employee must fill in what

a TD1 (federal tax form) and the provincial counterpart


What is the TD1 for Ontario called



What is a TD1

determine the amount of tax an employer will deduct from an employee's taxable earnings as it has amounts they can use to decrease their tax deducted at the source


TD1 form credits taken what does this represent

it increases their exemption amount


if an employee has more than basic exemption on their TD1 forms, they must do what

complete a new one each year


Can employees request more tax be deducted? if so, how do they do it

yes, on the federal TD1


If an employee is hired in a second part time position, what must they do with regards to the TD1

they must claim maximum exemption as their basic exemption can only be claimed once?


Barb is paid the following: a monthly salary of $6,000, a car allowance of $800 per month. She pays $400 into the company pension plan each pay.
What is her gross taxable income?
What is her net taxable income?
What would she pay tax on?

Gross taxable income
6,000 + 800 = 6,800

Net taxable income
$6,800 - 400 = 6,400

She would pay tax on $6,400


What are the penalties for non-compliance with regards to income tax deductions

subject to 10% penalty for the first occurrence

increases to 20% for second and subsequent occurrences in the same calendar year.

penalties are applied to amounts over $500 except in cases of willful delay or deficiency


If an employer is late remitting their source deductions (CPP, EI and income tax) what will happen

the will face penalties that will increase based on the number of days they are late


What are the penalties for source deductions be remitted late

1 - 3 days late 3%
4 -5 days late 5%
6 - 7 days late 7%
over 7 days late 10% or if no amount is remitted
Note: (CRA does not consider Saturday and Sunday or public holiday as business days so if payment falls on a Sunday you actually have until the Monday to remit)


what are the remitter frequencies for remitting source deductions

1. Quarterly
2. Regular
3. Accelerated remitter (Threshold 1 and Threshold 2)


What does AMWA stand for

average monthly withholding amounts


What is used to determine AMWA

based on two years prior
so for 2014, CRA would look at 2012


explain quarterly remitter

if your AMWA was less than $3000 and you have a perfect remittance history


Explain regular remitter

if your AMWA was less than $15,000


Accelerated Remitter:

Threshold 1: AMWA is between $15,000 to $49,999.99

Threshold 2: AMWA is over $50,000


What are the dates for remitting for Quarterly

April 15, July 15, Oct 15 and January 15


What are the dates for remitting for regular

the 15th day after the month following when deductions were collected


What are the dates for accelerated remitter? Threshold 1

Threshold 1:
1st to the 15th - remit on the 25th

from the 15th to the last day of the month - remit on the 10th day of the following month


What are the dates for accelerated remitter?
Threshold 2

payments must be made no later than 3 days after the end of the time period

1st of the month to the 7th

8th of the month to the 14th

15 of the month to the 21st

22nd to the last day of the month


how do you determine the dates of remittance

the employer uses the dates the employees are paid not the end date of their pay period


what are the 4 methods for calculating federal and provincial income tax deductions?

1. tables method (most common)
2. formula method
3. PDOC (Payroll deductions online calculator) replaces the TOD method
4. manual method

many companies also use computerized payroll software packages or services that do it automatically


How do you the table method for determining income tax

1. use federal tax tables
2. use provincial tax tables for Ontario
- tables are broken down into different pay periods
- can be obtained from CRA website

1. determine the net taxable income less credits and deductions (ie. RRSP contributions)

2. select the correct pay frequency tax tables ( ie. bi-weekly)

3. locate the correct net taxable income range

4. follow the line across to the correct claim code as per te employee's federal and provincial td1 forms.

5. the corresponding amount is the amount of tax to be deducted


what is the formula method for calculating income tax deduction

- also called the machine computation method
- refers to computerized payroll systems
- the formula used by these systems must first be approved by CRA


The manual method for calculating income tax

this is a complex method
- used rarely since the inception of PDOC


Other payments that affect income tax

2 others
1. bonus payments, pay in lieu of notice and vacation pay paid when no time is taken
2. retroactive payments
- both are calculated differently


why can't you tax bonus payments the same way?

bonus does not represent a regular pay period earning therefore they cannot be taxed using the regular pay period tax rules

Bonuses and such increase the amount an employee will make in the year and an adjustment will need to be made.


What is the calculation for bonuses adjustment for income tax.
ex. an employee who earns a weekly taxable income of $425, is paid a bonus of $300. the employee's federal and Ontario provisional TD1 claim codes are both basic

step 1:
divide the bonus being paid by the pay period type

$300 / 52 = 5.77

Step 2:
add the amount form step 1 to the employee's regular net taxable income

$425 + 5.77 = $430.77

Step 3:
look up the tax amount federal and Ontario provincial on the step 2 total

Federal tax on $430.77 = $25.55

Provincial tax: = $13.95

Step 4:
look up the tax amount on the employee's regular net taxable income federal and provincial

Federal tax on $425 = $24.95
Provincial tax on $425 = $13.10 or $13.50 (either is acceptable)

Step 5:
take the difference from step 3 and step 4 and multiply it by the pay period type
- this will give you the total amount of tax (federal and provincial) to be assed on the bonus payment

Federal : $25.55 - 24.95 = $.60
Prov: $13.95 - 13.10 = .85

federal $.60 x 52 = $31.20
prov: $.85 x 52 = 44.20

total tax: $75.40 this should be deducted from the bonus payment of $300


when do retroactive payments occur

when an employee receives a wage increase during the year that should`ve occurred in a prior pay period


How do you calculate the retroactive pay income tax adjustment

the difference between what they should have been paid and what was actually paid


Ex. of retroactive pay and income tax
Sheila's company gives their employees a wage increase the first pay period of each year, however, this year that did not happen until pay period 10. her rate in pay period 1 was $25.80 per hour, she received a cost of living increase of 1% therefore, her new rate of pay is $26.06. She is paid bi-weekly and she has basic tax deducted (claim code 1 for both provincial and federal) she works 40 hrs per week. she ahs no deductions

step 1: calculate the retro payment

retro = hrs per week x 2 (bi-weekly) x 9 pay periods x difference between her new rate and her old one

= 40 x 2 x 9 x (26.06 - 25.80)
= 720 x .26
= $187.20 retro payment

Step 2: calculate her tax on bi-weekly pay period at her new rate

new earnings per pay period = 80 hrs x 26.06

Fed: 252.75
Prov: 125.50

Step 3: calculate her tax on a bi-weekly pay period at her old rate

old earnings per pay period = 80 hrs x 25.8
fed tax: 247.45
prov tax; 124.05

Step 4: calculate the difference in tax amounts form her new rate to her old rate

fed: 252.75 - 247.45 = 5.30
prov: 125.50 - 124.05 = 1.45

Step 5: multiply the tax by the number for pay periods

fed: = 5.30 x 9 pay periods
= 47.70
prov: 1.45 x 9 pay periods
= 13.05

total tax on retro pay of $187.20 is equal to $60.75


) Sally Smith is due to be paid the following on January 23, 2014: her weekly salary of $1200.00, overtime $200.00, 4% vacation on her overtime, a taxable car allowance of $75.00 and a group life insurance non cash taxable benefit of $15.75. Sally pays into the company’s registered pension plan of 4% of her weekly salary and she also pays union dues of $8.00 each pay. Using this information please determine her gross taxable income and her net taxable income. She resides in Ontario. Please show all your work.

answer pending


Jennie receives a weekly salary of $950.00. She is a Payroll Manager for Broomsticks Emporium located in Windsor Ontario and as such is not entitled to overtime pay. However, she has been working long hours to ensure the T4s are issued on time. The Director has agreed to pay her $ 500.00 as a onetime bonus as a show of appreciation for all her hard work. She is a claim code 1 and on her signed and dated TD1 she has requested that payroll deducts an extra $25.00 in income tax each pay. Please calculate the income tax to be deducted this pay

answer pending


Roger Thumb works in Ontario at a manufacturing company. His hourly rate of pay is $31.50 and he works 40 hours per week, he does not work any overtime. He is paid biweekly. Effective pay period 7 Roger received a rate increase to $32.75 per hour. The new rate should have been effective pay period 1 therefore his company is giving him a retroactive payment with his pay on pay period 7 to cover the difference in wages he should have received since the beginning of the year. The payment will be made on a separate deposit from his regular pay. Calculate the net pay for his retroactive increase. He signed his TD1 form with claim code 2. Show all calculations.

answer pending


Using the CRA website please determine the amount of income tax to be deducted from the following-DO NOT USE THE PDOC CALCULATOR PLEASE USE THE ONTARIO TAX TABLES

a) Claim Code 1, Pay frequency – Biweekly Income of $2500.00, $100.00 RRSP, $5.00 United Way and a $200 cash allowance. Tax =
b) Claim Code 3, Pay frequency – Weekly Income of $1500.00, $500.00 RRSP and $100.00 non-cash allowance. Tax =
c) Claim Code 1, Pay frequency – Semi monthly Income of $6500.00 and a $500.00 cash allowance. Tax =
d) Claim Code 1, Pay frequency – Monthly Income of $9500.00, $200.00 union dues, $5.00 United Way, $200.00 Cash allowance and $200.00 non-cash allowance. Tax =

answer pending