How should the taxes be set up for an employee electing to have no tax withheld?

Don't put any Taxes on the Taxes tab.

Wait, change that answer.  Set the Withholding method to "Taxable, no withholding".

 Where would I do that?  I don't see the option in either the TAX tab or the TAX INFO screen.

On the Tax tab on the Employee screen

 Sorry, I'm using Canadian Payroll 5.5.  The option you are describing is in the US version of the software.  There is not such option in the Canadian version.

There is a Taxes tab under Employees profile in Canadian Payroll, just leave this tab empty would prevent the program from calculating tax.

This is exactly the same in US or Canadian Payroll.

 Choosing to leave the taxes tab empty could cause problems with T4 printing later.  If the earnings are in fact taxable but the employee does not want tax withheld a T4 still must be issued.  If there is no tax in the taxes tab, you will not get a T4.  I have run into this before where students are hired on a seasonal basis and will not earn enough to warrant taxes being deducted.  But, come the end of the year it is a good deal of work to record transaction history correctly to reflect the taxable earnings for a T4 when taxes are not withheld. 

The ideal solution would be to have the same tax withholding options in Cdn Payroll as US Payroll.

Since that is not available in Cdn Payroll, another solution is to add taxes to the taxes tab but to increase the Total Tax Credit amount high enough so that tax is not deducted.  Then T4's will be issued.

Hi Terri,

Thank you for your good inputs! I have the same situation and your solution will work for that.

I have this issue now.  The student elected to have no taxes deducted.  The T4 is issues, but reports no taxable earnings, just shows his EI and CPP deductions.  Any suggestion what to do in transaction history to get his earnings to print on the T4?

 In the Transaction History... Taxes Tab you need to add a line as follows:

Tax               Description                     Earnings before deductions

INCTAX         Income Tax                     put the dollar amount of the taxable wages here

Going forward, you should have a record in the employees tax tab for INCTAX, but the TOTAL TAX CREDIT should be set at 999,999.99 so the income is taxable, but no tax is withheld.

 AWESOME!  Thanks so much for the help!

No problem.  If you paid the employee this year already, you will need to make a similar adjustment for a correct T-4 next year also.  US version of payroll has a switch to handle this easily.  Maybe Canada will catch up at some point....