In business, financial responsibilities can often seem like a maze – overcomplicated, intricate, and never-ending. One labyrinth that business owners must navigate is Canada Pension Plan (CPP) contributions. Although not glamorous, CPP contributions are the key to financial security and peace of mind.
The question is: how do you calculate CPP contributions, and what's your role when it comes to remittance? This post will simplify the calculation process and provide an overview of what's expected when making your CPP contributions as an employer or as a self-employed individual.
What are Canada Pension Plan Contributions?
CPP is a government-mandated earnings-based social program designed to protect the contributor and their families against the loss of income associated with death, disability, or retirement.
As a business owner, not only are you responsible for withholding CPP contributions for your employees, but you must also make an additional contribution as an employer. If you’re self-employed, you’re responsible for making both an employee and employer contribution. In the next section, we'll go over how to calculate CPP contributions accurately in 2023, and with the upcoming changes in 2024.
How Do You Calculate CPP Contributions?
As a business owner or self-employed individual, you must understand how to calculate CPP contributions. It’s also important to ensure that you are up-to-date with the latest changes as part of the CPP enhancement initiative.
In 2023, contribution rates are calculated by taking the CPP earnings ceiling ($66,600 in 2023) and subtracting the basic exemption of $3,500.00 and multiplying that number by the contribution rate. The contribution rates for 2023 are as follows:
Employee Contribution Rate – 5.95% of earnings
Self-Employed Contribution Rate – 11.9% of earnings, which accounts for employee and employer contribution amounts
It is important to note that starting January 1, 2024, a second higher limit threshold will be introduced, known as the Year's Additional Maximum Pensionable Earnings (or second earnings ceiling).
The second earnings ceiling will only be used if an individual's earnings surpass the first ceiling. The contribution rate will be 8% for self-employed individuals (or 4% for employees) and will be paid on earnings above the first earnings ceiling up to the second earning ceiling. These will be called second CPP contributions.
For example, if you’re a self-employed individual and your annual earnings were $52,000 in 2023, your CPP contributions would be calculated as follows:
($52,000 - $3,500) x 11.9% = $5,771.50
If, for example, you’re a self-employed individual in 2024 and your annual earnings are $80,000, you would need to take into account your first and second contributions, which are calculated as follows (earning ceilings are 2024 estimations only):
First CPP Contribution
($67,700 - $3,500) x 11.9% = $7,639.80
Second CPP Contribution
($72,400 – $67,700) x 8% = $376.00
Total Contributions for 2024 = $8,015.80
When are CPP Contributions Due?
If you’re self-employed, you will remit your CPP contributions when you file your T1 Tax return, as your contributions will based on your net business income.
If you’re an employer with employees, you must remit deductions to the Canada Revenue Agency as part of your payroll deductions. If your Average Monthly Withhold Amount is less than $25,000, you'd be classified as a regular remitter, and you would need to remit deductions to the CRA before the 15th day of the month after the month you paid your employees. For more information regarding remittances of CPP, please speak to a professional or refer to CRA’s Payroll Deductions and Remittances Guide.
Now You Know: CPP Next Steps
CPP and government programs don’t need to be scary or complicated – it’s all about being in the know and keeping up-to-date with the changes and your obligations as an employer or self-employed individual.
The first step would be to determine your current obligations based on your situation and start preparing for the amounts due come tax time. This will alleviate a lot of stress when you're faced with a hefty bill. The 2024 CPP contribution rates have not yet been confirmed at the time of this blog writing, and therefore it will be imperative to check in for updates.
If you're an employer, ensure you've set up a good system for your payroll deductions. If you're unsure where to start with your CPP deductions or want to get them off your plate, contact us today for a free consultation!