Custom rules for benefits, deductions and earnings

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 a company-paid group life insurance plan to your employees as part of their regular employment. Typically, company-paid life insurance plans are 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). To setup this custom benefit in Payroll, go to settings-icon-gear.PNG  and select PAY RULES. Click on the BENEFITS tab and edit an unused rule (or add a new one). 

Give your rule a name - say, "Group Life Insurance". 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 'Group Life Insurance' 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 'Group Life Insurance' benefits aren't subject to EI calculations (as per the Canada Revenue Agency's guidelines). 

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

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. For our example, 'Group Life Insurance' should be assigned to box 40 (as per the Canada Revenue Agency's guidelines)

Here's what your screen should look like: 

Benefit-life-insurance.PNG  

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 (this time the employees are contributing, not the company). 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 edit an unused rule or add a new one. 

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  

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 taxable gross amount for the employee. We then create a custom DEDUCTION rule for "Company RRSP contribution" to take the funds back from the employee's NET pay. The overall effect is to increase the amount on which we calculate payroll taxes - the employee pays a bit more in taxes and receives a company-provided RRSP contribution. 

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, TAXABLE and TAXABLE PROV. Leave unchecked CPP and EI. This creates a benefit rule for Company RRSP contribution that adds the amount to the employee's taxable gross (but not their pensionable or insurable amounts). 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 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. Uncheck REDUCE TAXABLE GROSS - this will now deduct the amount from the employee's NET pay (after tax pay). 

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: $768.75 

Taxable Gross: $868.75 ($100 added to the taxable gross for the RRSP contribution) 

Pensionable Gross: $768.75 

Insurable Gross: $768.75 

After we run the tax calculations, we find that the following calculations: 

 

 

Compare this to a similar employee with no company-paid RRSP contributions: 

 

The employee with the RRSP contribution incurred an additional $32.73 in taxes but did receive $100 in contribution to his/her RRSP. 

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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