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As we progress into the year, more and more employees will discover their paycheques getting a little bigger. If you’ve ever wondered why you get more money when nothing has changed, please read on!
In Canada, the contribution rules for CPP and EI for employers and employees include a maximum earnings point. Once an employee’s gross income hits this point within the year, neither the employer or employee have to contribute money into the programs for the rest of the year. This means more money in your pocket for the rest of the calendar year.
The earnings maximum for CPP for 2015 is $53,600. However, the ‘rules’ allow for an exemption of $3,500. So, once you’ve earned $53,600, you no longer have to pay 4.95% of your earnings into the CPP. You will have paid into your CPP pension $2,479.95 of your own money and will no longer have to contribute until the start of a new calendar year.
The same process occurs with the Employment Insurance Program (EI). For this program, however, the maximum earnings for the year is $49,500. So, when your gross income hits that amount, you will no longer have to pay the 1.88% premium. The maximum premium payment cap of $930.60 is what you will pay in a year, regardless of how high your income is.
So, when your cumulative gross pay amount for the year reaches around $50,000, you can expect to see more take home pay as you will no longer have to pay into these two programs. You will cease paying 4.95% on your income over $53,600 and will stop paying premiums of 1.88% on income over $49,500.
However, there is ONE CAVEAT: If you hit the maximums in the year, but change employers, you must start to contribute to these programs again as if you are starting a new calendar year! Don’t fret – when you file your income tax return the next spring, you will get your overpayments back.
Employers – when you replace terminated, retired or workers who have quit and have hit the maximums for both EI and CPP payments, realize that your payroll costs will increase (assuming all other things, such as salary, are the same). This won’t be a large cost, but a cost nonetheless.
Employees – when you’ve hit the maximums and if you change jobs within the year, remember that you are starting from square one in terms of your EI and CPP payments as if it were January 1st no matter the time in the year you were to start the new job. All of your EI and CPP premiums at the new job, however, will just be refunded to you next spring. If you would prefer not to wait till next spring for the refund, you can contact the CRA. They will send you a letter to give to your employer instructing them to deduct the equivalent amount of the overpayment amounts from your income tax withholding instead.
So for the last few months of the year, employees, enjoy the larger pay cheques, and employers, be prepared for payroll increases and keep tabs on the status of your employees.