When paying bonus to your staff in Canada, the following amounts must be deducted: Canada Pension Plan (CPP) contributions (excluding the basic exemption amount if paid separately), Employment Insurance (EI) premiums, and income tax.
Calculating Bonus: Tips and Considerations
While bonus pay can be a powerful employee incentive, it’s not always guaranteed. To be eligible for a bonus, your employment contract must outline clear criteria in advance. For example, achieving specific performance goals may entitle your employee to a $1000 bonus at year-end or during busy holiday periods.
When calculating bonus payments, it’s important to note that typical employee source deductions (such as income tax, Canada Pension Plan contributions, and Employment Insurance premiums) will likely apply, just as they do to regular salary payments. Your payroll software can help you calculate these amounts and submit them to the Canada Revenue Agency alongside your usual payments.
To ensure clarity and avoid confusion, bonuses should be tied to measurable performance goals and professional achievements. It’s also important to distinguish bonus pay from regular salary and cost-of-living adjustments.
Types of Employee Bonuses: Incentives to Encourage and Reward Your Staff
There are several ways to incentivize and recognize your employees, including:
- Cash bonuses added to their regular paychecks.
- Year-end bonuses
- Non-cash rewards such as a new iPhone or other tangible incentives
- Additional paid time off, such as a second free day
Regardless of the type of bonus you offer, it’s important to remember that all forms of bonus income are considered taxable. When processing payroll, be sure to account for these bonuses and include them as taxable income.
What is Commission and How Does it Work?
Commission is a payment structure based on a salesperson’s performance and the number of items they have sold. In Canada, employees who earn commissions may be eligible for tax deductions that salaried employees are not, due to the additional expenses that commission workers often incur. This is because commission workers are typically responsible for covering costs that salaried workers do not have to bear.
Calculating Commissions: Tips and Considerations
Many businesses opt for commission-based pay structures to boost team engagement, staff productivity, and sales. While commissions can allow employees to earn more money, they may also enable your company to pay lower wages to workers.
There are several ways to structure commission payments, including:
- Salary plus commission in retail businesses, where employees receive a base salary and a percentage of sales.
- Commission-only pay for real estate agents, who do not receive a base salary and have no earnings ceiling.
- A draw against commission, where employees receive an advance payment on upcoming sales.
- Residual commissions for insurance agents, who earn a portion of revenue each time a customer renews their coverage.
It’s important to clearly outline how commissions will be paid in your employment contract. Additionally, employers must withhold income tax, Canada Pension Plan (CPP), and Employment Insurance (EI) from commission payments in the same way they do for wages and salaries.
To summarize, bonuses should be tied to specific, measurable performance goals and professional achievements. It’s important to keep incentives separate from regular pay and cost-of-living adjustments to avoid any misunderstandings. Employee bonuses may be subject to customary deductions for income tax, Canada Pension Plan (CPP), and Employment Insurance (EI).
Additionally, some businesses offer commission-based compensation to motivate teams, increase productivity, and boost sales. In Canada, employees who earn commissions may be eligible for tax benefits, such as tax deductions, that salaried workers do not receive. The commission payment schedule should be clearly outlined in the employment agreement.