How to calculate payroll deductions in Ontario

Collect the forms before the first pay run

Income tax withholding starts from the employee’s claimed personal tax credits, which come from Form TD1, Personal Tax Credits Return. The CRA says employers must get a completed TD1 when someone starts work and within 7 days of a change that may reasonably be expected to change the employee’s credits. Nobody has to complete a new form each year unless their amounts change.

In Ontario, an employee who claims more than the basic personal amount also completes the provincial TD1ON. An employee with two employers at the same time cannot claim the same credits twice. If a TD1 never arrives for a new employee, you still deduct and remit, using only the basic personal amount, so keep asking for the form; for an existing employee who did not complete new forms, the CRA’s rule is to keep using the claim code you used before.

Follow the calculation order

The CRA lists the manual steps in a fixed order: CPP contributions on base and first additional pensionable earnings, then the second additional CPP (CPP2), then EI premiums, then income tax, and finally GST/HST on any taxable benefit that requires it. The order matters because CPP and EI are themselves inputs to the income tax formula, so tax cannot be finalized first.

You can calculate with the CRA’s published tables, manually with its step-by-step formulas, or with the Payroll Deductions Online Calculator. Whatever method you use, start from the employee’s pensionable and insurable earnings for the pay period, which include wages, overtime and most taxable benefits, rather than from the figure that happens to land in the bank.

CPP and CPP2 in 2026

For 2026 the CPP rate is 5.95%, charged on pensionable earnings above a $3,500 yearly basic exemption and up to a $74,600 ceiling. The maximum employee contribution is $4,230.45. The exemption is spread across pay periods, so the manual method subtracts $3,500 divided by your number of pay periods before applying the rate. The CRA’s tables already build that share in.

CPP2 applies to earnings between $74,600 and $85,000 at 4%, for a maximum of $416. Both the employee and the employer pay CPP and CPP2, and your share equals the employee’s. Keep a running total for each person, because you stop deducting once they reach the maximum with you, even if another employer is also deducting.

EI premiums in 2026

Outside Quebec, the 2026 employee EI premium rate is 1.63% of insurable earnings up to $68,900, for a maximum of $1,123.07. Unlike CPP, the CRA’s EI steps have no basic exemption to subtract; the rate is applied to insurable earnings directly. Your share is normally 1.4 times the employee’s premium, up to $1,572.30, unless you have a reduced rate under an approved plan.

Insurable earnings include gross pay plus any taxable benefits that are insurable, such as a taxable benefit received in cash. If you are unsure whether an item is insurable or pensionable, check it before the pay run rather than at T4 time, when a correction is harder.

Income tax: tables, claim codes and the Ontario formula

Income tax is not a flat percentage. The CRA’s Ontario tables combine the federal and provincial amounts for each pay period. You find the claim code that matches the total claim amount on the employee’s TD1 and TD1ON, read the pay range, and take the federal and provincial amounts shown. For 2026, federal claim code 1 covers total claim amounts up to $16,452 and the Ontario code 1 covers amounts up to $12,989.

The underlying provincial formula includes Ontario’s surtax and the Ontario health premium, which is one reason a table or calculator is more reliable than a quick percentage. If an employee asks for extra tax to be withheld on the TD1, add that fixed amount to every payment. If the employee ticks that total income is less than the total claim amount, you do not deduct federal or provincial tax unless you believe the statement is false.

An illustrative example

Assume a monthly salary of $4,000 in 2026, with no pension plan and no extra tax requested. This is an illustration, not a payroll run.

CPP: the monthly exemption is $3,500 divided by 12, or $291.67. Contributory earnings are $4,000 minus $291.67, or $3,708.33, and 5.95% of that is about $220.65, deducted from the employee and matched by you. EI: 1.63% of $4,000 is $65.20 from the employee, and your share at 1.4 times is $91.28. Income tax comes from the tables or calculator using the claim codes.

Your remittance for that employee is therefore CPP of about $441.30 (both shares), EI of $156.48 (both shares) and the income tax withheld. The employee’s net pay is $4,000 minus $220.65, $65.20 and the income tax. Your own cost of employing that person is the $4,000 plus your CPP and EI shares, before other costs.

What you remit and when

Withholding is only half the job. You remit the employee amounts you withheld together with your own CPP and EI shares. When the money is due depends on your remitter type, which the CRA sets mainly from your average monthly withholding amount from two years earlier. A regular remitter pays monthly by the 15th of the following month; small employers with a perfect compliance record may be quarterly remitters, and larger payrolls remit up to four times a month.

Check your remitter type in your CRA business account rather than assuming it. Remitting earlier than required is accepted without changing your type. Late or missing remittances can attract penalties, which the article on late payroll remittance penalties covers separately.

Check the numbers and fix mistakes early

Compare each pay run with the Payroll Deductions Online Calculator, which the CRA provides so you can confirm the deductions you put on your statement of earnings. Its printed output is not itself an official statement of earnings, so you still need to follow Ontario’s employment standards for what a statement must show.

If you under-deduct CPP or EI, you owe both shares to the CRA. You may recover the employee’s portion from later pay, but not more per payment than should have been deducted, not for amounts outstanding more than 12 months, and you cannot adjust income tax to cover the shortfall. If you over-deduct, reimburse the employee where you can and adjust your records. Reconcile to your year-end T4 totals as well.

What to bring to your accountant

Bring each employee’s TD1 and TD1ON, the pay frequency, your remitter type, remittance confirmations and a payroll register. If you run payroll yourself, say which method you use so the same figures can be checked against the T4 summary. An accountant or payroll provider can help you set up the process; the legal responsibility to deduct and remit stays with the employer.