Custom rules for benefits and deductions

Custom pay rules

One of the more powerful features of Payroll is the ability to customize how deductions, benefits and additional earnings are calculated and taxed. 

This is definitely an "advanced" feature and we'd recommend asking your accountant or tax official for advice on how changing these calculations might affect your business. The system, however, will support any number of calculation and tax methods for your customized deductions, benefits and other earnings. 

To start, you should first understand the concepts of gross wage, taxable gross, pensionable and insurable earnings - search for the terms and make sure you understand their use in payroll calculations. In Canada, benefits and deductions can be subject to CPP (Canada Pension Plan), EI (Employment Insurance), Federal Tax, and Provincial Tax. You can assign these to each deduction or benefit - giving you a lot of flexibility in how to calculate each custom benefit or deduction. 

To determine if a benefit or deduction is subject to taxes or withholding, please refer to the Canada Revenue Agency guide  Employers' Guide to Taxable Benefits and Allowances

Overview

To take advantage of these custom pay rules, you'll first create the rule and then apply it individually to the employees that are affected.

Payrule-workflow.png  

Custom Benefits

Let's say your company wants to provide certain employees with a gym membership as part of their regular employment. Typically, a gym membership, if paid directly to the gym on the employee’s behalf, is subject to Federal and/or Provincial tax (they are taxable benefits), are subject to CPP (they are pensionable) and not subject to EI (not insurable). They are non-cash when paid directly to the gym.  Ask your accountant or CRA for clarification on what your rule needs to be.

To setup this custom benefit in Payroll, go to   and select PAY RULES. Click on the BENEFITS tab and  add a new rule.

Give your rule a name - say, "Gym Membership". This description will be used in the system to track amounts and will be used on your employee payslips to describe that line item in their pay.

Check ENABLED to turn the rule on and mark it as available to be added to the profiles of your employees. 

GL Code - if you'd like to assign a custom general ledger code to this benefit, go ahead and enter the numbers. This should match the chart of accounts used in your general ledger and/or accounting program. If you assign a custom GL, the amounts here can be exported to your accounting program. 

CPP - checking the box makes the amount subject to CPP calculations (increasing your employee's pensionable earnings). Unchecking the box makes the benefit CPP-exempt (not subject to the CPP and not adding the amount to your employee's pensionable earnings). For our “Gym Membership” example, this should be checked because we want the amount to be subject to CPP calculations. 

EI - checking the box makes the amount subject to EI calculations (adding the amount to your employee's insurable earnings). Unchecking the box makes the benefit EI-exempt (not subject to the EI calculations and not adding the amount to your employee's insurable earnings). For our example, this should be unchecked so our “Gym Membership” benefits aren't subject to EI calculations (as per the Canada Revenue Agency's guidelines on non-cash taxable benefits). 

Taxable (federal) - checking this box makes the amount subject to federal taxes (increasing the taxable gross of the employee). Unchecking the box will have the net effect of not adding the amount to the taxable gross of the employee (the amount will not be taxed federally). For this example, it should be checked. 

Taxable (province) - checking this box makes the amount subject to provincial or territorial taxes. For our example, this should be checked. 

Non Cash - check this box if this is a non-cash benefit.  This means you do not give the cash to the employee directly, but to a third party on their behalf.

T4 Box - if you would like to assign a custom code for tracking on your employee year end tax forms (T4) then enter it here. Here's what your screen should look like:  

Once the rule has been created we can go employees>edit and click on the benefits tab and add our new benefit from the dropdown menu.

It will now show up in the rules for the employee and you can enter an amount, either as a dollar or percentage (this can be different for each employee).  Save it and it will run each time you do payroll. 

Note** Often a gym membership is often a monthly premium amount.  You will need to know the amount on a per payrun basis (according to CRA guidelines which say it should be taxed as it is enjoyed).  To get this amount here is the formula:

Monthly Rate x 12/ # of pays per year.

Ex: our monthly rate is $50 and our pay period is bi-weekly

50x 12= $600/year.  Divide $600 by 26 (bi-weekly) =$23.08 per payrun.  Enter $23.08 in the dollar amount in this example.

Custom Deductions

Now let's try another example - this time a deduction. We want to deduct premiums for a life insurance policy for our employees (the employees are paying for it). The amount we are deducting should come from the employees NET pay (i.e. after all tax calculations). To setup the deduction, go to the SETTINGS menu and select PAYROLL RULES. Click on the DEDUCTIONS tab and add a new rule. 

Give your rule a name, say "Life Insurance premium" - this will show on your employee payslips. 

Check ENABLED to turn the rule on and mark it as available to be added to the profiles of your employees. 

GL Code - if you'd like to assign a custom general ledger code to this benefit, go ahead and enter the numbers. This should match the chart of accounts used in your general ledger and/or accounting program. If you assign a custom GL, the amounts here can be exported to your accounting program. 

Reduce taxable gross - Checking this box will deduct the amount from the employee's taxable gross. Unchecking this box will deduct the amount from the employee's net pay. For our life insurance premium example, we want the amount deducted from the employee's net pay - so we will leave the box unchecked. 

Here's what your screen should look like: 

Deduction-life-policy.PNG  Go and add to employees with a per payrun dollar/percentage amount the same as above.

Using a benefit and deduction to create a taxable, employer-paid benefit 

Now let's use a combination of benefits and deduction rules to create a company-paid benefit that incurs tax for the employee. For example, a company provided RRSP contribution is often regarded as a taxable benefit to the employee (check with your accountant or tax consultant if that is true for your company). We can do this by creating custom BENEFIT rule for "Company RRSP contribution" - adding the contribution to the pensionable/taxable gross amount for the employee. We then create a custom DEDUCTION rule for "Company RRSP deduction" to take the funds back from the employee to reduce their net taxable income. 

Here's how to enter this in the system: 

Go to the SETTINGS menu and select PAYROLL RULES. Click on the BENEFITS tab and edit an unused rule or add a new one. 

Give your rule a name - say, "Company RRSP contribution". This description will be used in the system to track amounts and will be used on your employee payslips to describe that line item in their pay. 

Check ENABLED, CPP, TAXABLE and TAXABLE PROV. Leave EI unchecked . This creates a benefit rule for Company RRSP contribution that adds the amount to the employee's pensionable/taxable gross (but not their insurable amount). Save the rule. 

Go to the DEDUCTIONS tab and edit an unused rule (or add a new one). 

Give your rule a name - say, "Company RRSP deduction". This description will be used in the system to track amounts and will be used on your employee payslips to describe that line item in their pay. 

Check ENABLED. Check REDUCE TAXABLE GROSS - this will now deduct the amount from the employee's NET Taxable Income. 

Sample calculation 

Let's give our employee $100 as a company-paid RRSP contribution (edit the employee, and add the benefit for $100, and then create a deduction for $100). The employee's gross wage for the pay period is $768.75. 

Gross pay: $868.75 

Taxable Gross: $768.75 ($100 subtracted from the taxable gross for the RRSP contribution) 

Pensionable Gross: $868.75 

Insurable Gross: $768.75 



 

 

These are just some examples of how to use our payroll rules to define custom benefits and deductions for your employees. If you have questions about the tax implications of various benefits and deductions, please consult your tax advisor or accountant. Based on their advice, Payroll's custom rules for benefits and deductions will be able to handle the calculations for you.

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