Know Which Taxes You Need to Collect
As a small business owner, do you know which taxes you need to collect? The first thing to consider when understanding the taxes for your small business, is your business structure. The most common business structures for small businesses are corporations, sole proprietorships, and partnerships. Let’s dive into each one and see how they differ when it comes to taxes.
Corporate Income Tax Vs Personal Income Tax
A corporation is a separate legal entity from its owners, which means it can sue and be sued, enter into contracts, own assets, and pay taxes. When you run a corporation, you’re responsible for paying corporate income tax on its profits. The corporate tax rate in British Columbia is 11%.
A sole proprietorship, on the other hand, is a business owned and run by a single person. As a sole proprietor, you don’t pay corporate income tax on your business’s profits. Instead, you report your business’s income and expenses on your personal income tax return, and pay personal income tax on the net profit.
Lastly, a partnership is a business owned and run by two or more people. Like sole proprietorships, partnerships don’t pay corporate income tax on their profits. Instead, the partners report their share of the partnership’s income and expenses on their personal income tax returns and pay personal income tax on their share of the net profit.
Goods and Services Tax (GST) and the Provincial Sales Tax (PST)
So that’s corporate income tax and personal income tax. How about Sales Tax?
In British Columbia, small businesses also have to collect and remit two types of taxes: the Goods and Services Tax (GST) and the Provincial Sales Tax (PST).
The GST is a federal tax of 5% on the sale of most goods and services in Canada. As a small business owner, you must register for the GST and collect it from your customers if your annual taxable supplies exceed $30,000. You then have to remit the GST you collected to the Canada Revenue Agency (CRA).
PST, on the other hand, is a provincial tax of 7% on the sale of most goods and services in British Columbia. Like the GST, you must register for the PST and collect it from your customers if your annual taxable supplies exceed $10,000. You then have to remit the PST you collected to the British Columbia Ministry of Finance.
It’s important to note that some goods and services are exempt from GST and PST, so make sure you check with the CRA and the British Columbia Ministry of Finance to see if your products or services fall under these exemptions.
Taxes for Employees
Let’s start with the basics. If you have employees, you’re responsible for withholding and remitting several taxes from their paychecks, including income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums.
Income tax is a federal and provincial tax that’s deducted from an employee’s pay based on their taxable income. As an employer, you’re responsible for calculating the amount of income tax to withhold from each paycheck and remitting it to the Canada Revenue Agency (CRA) on behalf of your employees.
The CPP is a federal pension plan that provides retirement, disability, and survivor benefits. Both you and your employees have to contribute to the CPP. As an employer, you have to withhold CPP contributions from your employees’ paychecks and match their contributions. The current CPP contribution rate is 5.95% for both employers and employees.
EI is a federal program that provides temporary financial assistance to eligible workers who lose their job or can’t work due to illness, injury, or quarantine. Both you and your employees have to contribute to EI. As an employer, you have to withhold EI premiums from your employees’ paychecks and pay an equal amount on their behalf. The current EI premium rate is 1.63% for both employers and employees.
Need help calculating your employee deductions? You can use the Payroll Deductions Online Calculator (PDOC) to calculate income tax, CPP and EI deductions on the CRA’s website. https://www.canada.ca/en/revenue-agency/services/e-services/e-services-businesses/payroll-deductions-online-calculator.html
Employer Health Tax
One more employee tax you need to consider, but might not know about, is the Employer Health Tax (EHT). Unlike other taxes, the EHT is not based on current BC earnings as they are paid. It is a payroll tax on remuneration, so the total amount you pay out in salaries, wages, bonuses, taxable benefits and stock options.
The amount you pay is based on the total remuneration for the prior year or an estimate of the current year’s remuneration. The EHT rate in British Columbia is 2.925% x (Payroll – $500,000) for employers with payrolls between $500,001 and $1,500,000 and 1.95% on total payroll for employers with payrolls greater than $1,500,000 . There is no EHT for payrolls less than $500,000. Calculator employer health tax calculator
Finally, while it is not a tax, it is important to remember to collect Workers’ Compensation premiums. As an employer, you have to pay Workers’ Compensation premiums to cover your employees in case they get injured on the job. The premium you pay depends on your industry and the type of work your employees do. To understand more about WorkSafeBC and the premiums, consider booking at Talk to a WorkSafeBC Expert appointment with us.
It’s important to note that business and payroll taxes are subject to change, so make sure you stay up to date on any changes by checking the CRA’s website regularly, and logging into your My Business Account to know, ahead of time, what you need to pay and when.
Small Business BC is Here to Help
SBBC is a non-profit resource centre for BC-based small businesses. Whatever your idea of success is, we’re here to provide holistic support and resources at every step of the journey. Check out our range of business webinars, on-demand E-Learning Education, our Talk to an Expert Advisories, or browse our selection of business articles.