Gratuities and Retroactive Pay

Source deductions of income tax

Gratuities and retroactive pay are subject to source deductions of income tax.

If an employee's estimated annual remuneration, including a gratuity or retroactive pay, is not more than $15,269 for the year, the gratuity and retroactive pay are subject to source deductions of income tax at a rate of 8%.

Otherwise, you can use the formulas in the guide entitled Formulas to Calculate Source Deductions and Contributions (TP-1015.F-V) to determine the amount of income tax to withhold from the gratuity or retroactive pay.

You can also use the Source Deduction Table for Québec Income Tax (TP-1015.TI-V) to calculate the source deduction of income tax as shown in the examples below.

Example – First gratuity paid in the year

John earns a salary of $540 per week. He also receives a gratuity of $2,500 in March. The deduction code that corresponds to the amount on line 10 of his Source Deductions Return (TP-1015.3-V) is D.

  1. Divide the amount of the gratuity by the number of pay periods in the year: $2,500 ÷ 52 = $48.08.
  2. Add $48.08 to $540, for a total of $588.08 per week.
  3. To calculate the additional weekly source deduction of income tax resulting from the gratuity of $48.08, consult the section of table TP-1015.TI-V marked “52 pay periods per year.” Calculate the additional deduction. The amount withheld from $588.08 minus the amount withheld from $540: $16.72 − $10.72 = $6.00.
  4. To determine the amount of income tax to withhold from the gratuity of $2,500, multiply the additional source deduction of $6.00 by 52 (that is, the number of pay periods in the year): $6.00 × 52 = $312.00.
  5. The income tax to be withheld for the pay period is therefore $322.72, that is, $10.72 + $312.00.

Example – Other gratuities paid in the year

Laura earns a salary of $540 per week. She also receives a $2,500 gratuity in March and a $1,040 gratuity in July. The deduction code that corresponds to the amount on line 10 of her TP-1015.3-V form is D. The income tax to be withheld from the first gratuity is calculated as in the previous example (first gratuity paid in the year). The income tax to be withheld from the second gratuity is calculated as follows:

  1. Divide the amount of the second gratuity by the number of pay periods in the year: $1,040 ÷ 52 = $20. Add the result to the weekly remuneration subject to source deductions: $540 + $20 = $560.
  2. Divide the amount of the gratuities previously paid by the number of pay periods in the year: $2,500 ÷ 52 = $48.08.
  3. Add the amounts obtained in steps (a) and (b): $560 + $48.08 = $608.08.
  4. To calculate the additional weekly source deduction of income tax resulting from the second gratuity, consult the section of table TP-1015.TI-V marked “52 pay periods per year.” Calculate the additional weekly deduction. The amount withheld from $608.08 minus the amount withheld from $588.08: $16.53 − $13.53 = $3.00
  5. To determine the amount of income tax to withhold from the gratuity of $1,040, multiply the additional source deduction of $3.00 by 52 (that is, the number of pay periods in the year): $3.00 × 52 = $156.00.
  6. The income tax to be withheld for the pay period is therefore $166.72, that is, $10.72 + $156.00.

Use the same method for each subsequent gratuity paid to Laura.

Example 3 – Retroactive pay

Eric's remuneration is increased from $325 to $350 per week. The increase is retroactive to 10 weeks, which gives him a retroactive payment of $250 ($25 × 10). The deduction code that corresponds to the amount on line 10 of his TP-1015.3-V form is A.

  1. To calculate the additional weekly source deduction of income tax resulting from the pay increase, consult the section of table TP-1015.TI-V marked “52 pay periods per year.” Calculate the additional deduction. The amount withheld from $350 per week minus the amount withheld from $325 per week: $5.66 − $2.13 = $3.53.
  2. Multiply the additional source deduction of $3.53 by the number of weeks covered by the retroactive pay increase: $3.53 × 10 = $35.30.
  3. The amount of income tax to be withheld from Eric's remuneration for the pay period is therefore $40.96, that is, $5.66 + $35.30.

Québec Pension Plan (QPP) contributions

If you pay an employee a gratuity or retroactive pay during a pay period, and you pay the amount with the employee's salary or wages for the period, add the amount to the salary or wages and calculate the employee's QPP contribution using the usual method.

However, if you pay the amount separately from the employee's salary or wages, withhold the lesser of the following amounts:

  • 5.55% of the gross amount (without taking the exemption into account, since it is already taken into account in the salary or wages);
  • the employee's maximum contribution for the year, minus the amounts already withheld.

Example – Amount paid separately from an employee's salary or wages

Anna earns $515 for the pay period from May 17 to 21, 2019, and also receives, separately from her salary or wages, a gratuity of $100. To date, a total of $500 in QPP contributions has been withheld from her salary or wages. The amount that can be withheld for the pay period cannot be more than $2,491.45 which is the employee's maximum annual QPP contribution minus the amounts already withheld for the year ($2,991.45 - $500).

Based on Table A of the Source Deduction Tables for QPP Contributions (TP-1015.TR-V), a QPP contribution of $24.85 must be withheld from the salary or wages of $515, and one of $5.55 from the gratuity of $100 (5.55% x $100, no exemption). The total QPP contribution withheld for the pay period is therefore $30.40.

Québec parental insurance plan (QPIP) premiums and other employer contributions

If you pay an employee a gratuity or retroactive pay during a pay period, the amount is subject to employee and employer Québec parental insurance plan (QPIP) premiums, the employer contributions to the health services fund and the contribution related to labour standards, if one of the basic conditions is met.

You must include this amount in your total payroll used to calculate your health services fund contribution rate, your participation in workforce skills development and, if applicable, your contribution to the Workforce Skills Development and Recognition Fund (WSDRF).

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