How to Do Payroll for Small Business in Canada: A Complete Guide

Let me tell you a story.

When I started my first small business in Canada, I thought payroll was just “paying people.”

Big mistake.

I missed a CRA deadline, got slapped with a penalty, and spent a weekend untangling the mess.

Sound familiar?

Payroll isn’t sexy, but it’s the backbone of keeping your team happy and the government off your back.

If you’re running a small business in Canada, you’re probably wondering how to do payroll for small business in Canada without losing your mind—or your profits.

I’ve been there, screwed it up, and figured it out.

By the end, you’ll know exactly what to do, what to avoid, and how to save time and money.

Let’s get started.

What You’ll Need for Small Business Payroll in Canada

Before diving into the payroll process, you need to gather several essential items and complete some preliminary steps to set yourself up for success with small business payroll in Canada.

Essential Registrations:

• Business Number (BN) – Your business identifier with the Canada Revenue Agency (CRA)
• Payroll Program Account – Required to remit payroll deductions to the CRA
• Provincial/territorial employer accounts – Varies by location (especially important in Quebec)
• Workers’ Compensation Board (WCB) account – Mandatory in most provinces

Employee Information Requirements:

• Completed TD1 forms (federal and provincial)
• Social Insurance Numbers (SIN)
• Banking information for direct deposits
• Personal details (address, date of birth, etc.)
• Employment agreements or contracts

Payroll Tools and Resources:

When it comes to managing payroll for small business in Canada operations, having the right tools can save countless hours and prevent costly errors.

Top Recommended Payroll Solutions for Canadian Small Businesses:

1. QuickBooks Online Payroll – Excellent integration with accounting software
2. Wagepoint – User-friendly interface designed specifically for Canadian small businesses
3. PaymentEvolution – Free basic option for very small businesses
4. Rise – Great all-in-one HR and payroll solution
5. ADP Workforce Now – Comprehensive solution for growing businesses

The investment in good payroll software typically pays for itself through time savings and error reduction. Even the simplest systems will calculate deductions automatically, a task that’s notoriously complex in Canada due to varying provincial regulations.

If your budget is tight, the CRA offers a free Payroll Deductions Online Calculator (PDOC) that can help with calculations, though you’ll still need a system for record-keeping.

Read also: Top 6 Free Payroll Software for Small Businesses in Canada

Step-by-Step Instructions On How to Do Payroll for Small Business in Canada

Let’s break down the entire process of how to do payroll for small business in Canada operations into manageable steps:

Step 1: Register for Necessary Accounts

Before processing your first payroll, you must register with various government agencies:

1. Obtain a Business Number (BN) if you don’t already have one
   • Apply online through the CRA My Business Account
   • By phone: 1-800-959-5525
   • Processing typically takes 1-2 business days
2. Register for a Payroll Program Account
   • This is a sub-account of your BN
   • Can be done simultaneously when applying for your BN
   • Required even if you only have one employee
3. Provincial registrations
   • Quebec employers must register with Revenu Québec
   • Ontario employers need a Workplace Safety and Insurance Board (WSIB) account
   • Check your provincial requirements carefully

Warning: Failing to register before paying employees can result in penalties. Don’t wait until your first hire is imminent—register as soon as you know you’ll be bringing on staff.

Step 2: Set Up Your Payroll System

Choosing and implementing a payroll system is a critical decision for your business:

1. Evaluate payroll solutions based on:
   • Number of employees
   • Budget constraints
   • Required features (direct deposit, multiple pay rates, etc.)
   • Integration with accounting software
2. Configure your payroll settings:
   • Pay periods (weekly, bi-weekly, semi-monthly, monthly)
   • Company tax information
   • Remittance schedule (determined by your average monthly withholding amount)
   • Vacation pay calculations
   • Statutory holiday settings
3. Set up your Chart of Accounts to properly track:
   • Payroll expenses
   • Liabilities for remittances
   • Employee benefits

Tip: Semi-monthly pay periods (15th and end of month) often provide a good balance between administrative workload and employee satisfaction.

Step 3: Collect and Input Employee Information

For each new employee, you’ll need to:

1. Gather completed tax forms:
   • Federal TD1 (Personal Tax Credits Return)
   • Provincial TD1
   • Direct deposit authorization
2. Verify Social Insurance Numbers
   • Check that the SIN provided has 9 digits and doesn’t start with 0 or 8
   • Ensure the name matches government ID
3. Record employment details:
   • Start date
   • Position/job title
   • Pay rate
   • Benefits eligibility
   • Vacation entitlement
4. Set up special deductions (if applicable):
   • Group insurance premiums
   • RRSP contributions
   • Union dues

Warning: Handling employee personal information comes with privacy obligations. Familiarize yourself with the Personal Information Protection and Electronic Documents Act (PIPEDA) requirements for storing sensitive data.

Step 4: Calculate Pay and Deductions

This is where the rubber meets the road in payroll for small business in Canada operations:

1. Calculate gross pay based on:
   • Hours worked for hourly employees
   • Salary amounts for salaried staff
   • Overtime (varies by province, but typically 1.5x regular rate)
   • Bonuses, commissions, or other variable pay
2. Calculate and withhold mandatory deductions:
   • Canada Pension Plan (CPP) contributions
   • Employment Insurance (EI) premiums
   • Federal and provincial income tax
   • Provincial health premiums (where applicable)
3. Calculate employer contributions:
   • Matching CPP contributions
   • 1.4x employee EI premiums
   • Workers’ compensation premiums
   • Employer Health Tax (in applicable provinces)

Key Insight: As of 2025, the CPP contribution rate is 5.95% for both employees and employers, applied to earnings between $3,500 and $68,600 (the Yearly Maximum Pensionable Earnings or YMPE).

Tip: Always use the most current tax tables from the CRA or up-to-date payroll software to ensure accuracy.

Step 5: Process Payments

Once calculations are complete, it’s time to pay your employees:

1. Choose a payment method:
   • Direct deposit (most efficient and preferred)
   • Physical paychecks (requires special check stock)
   • E-transfer (works for small teams)
2. Generate pay stubs showing:
   • Gross earnings
   • Itemized deductions
   • Net pay
   • Year-to-date totals
3. Distribute pay statements to employees:
   • Electronic delivery is acceptable if employees have private access
   • Must be provided on or before pay day

Warning: In most provinces, there are strict rules about when employees must be paid. Typically, wages must be paid within 8 days of the end of a pay period.

Step 6: Submit Remittances to CRA

Your responsibility doesn’t end after paying employees:

1. Determine your remittance schedule:
   • New small employers typically remit quarterly
   • As withholdings increase, you may need to remit monthly or even bi-weekly
   • The CRA will notify you of your required schedule
2. Calculate total remittance amount:
   • Employee income tax, CPP, and EI deductions
   • Employer portions of CPP and EI
3. Submit payment by the deadline:
   • Online through My Business Account
   • Through your financial institution
   • By mail with a remittance voucher (Form PD7A)

Critical Warning: Late remittances incur substantial penalties starting at 3% for delays under 3 days and increasing to 10% for delays of 7+ days. The CRA takes these deadlines very seriously.

Step 7: Maintain Accurate Records

Proper record-keeping is essential for small business payroll in Canada:

1. Keep detailed records of:
   • All payroll calculations
   • Copies of employee tax forms
   • Records of remittances
   • Time sheets or work hour records
2. Retain payroll records for at least six years from the end of the tax year to which they relate
3. Implement a secure, organized filing system for both paper and electronic records

Tip: Even if you use cloud-based payroll software, regularly export and back up your payroll data. Don’t rely solely on the software provider to maintain your records.

Step 8: Complete Year-End Processes

The annual payroll cycle concludes with several important tasks:

1. Prepare and distribute T4 slips to all employees by the last day of February
2. Submit T4 Summary to the CRA by the last day of February
3. Reconcile your payroll accounts to ensure all deductions match remittances
4. Review and update payroll information for the new year:
   • TD1 updates from employees
   • New annual maximum insurable earnings
   • Changes to tax rates or brackets

Best Practice: Start year-end processes early (mid-January) to ensure ample time to correct any discrepancies before deadlines.

Tips for Success with Payroll for Small Business in Canada

Mastering payroll for small business in Canada operations goes beyond following the basic steps. Here are some advanced tips that will save you time, money, and stress:

Establish a Consistent Payroll Schedule

Create a detailed payroll calendar for the entire year that includes:

• All pay dates
• Remittance deadlines
• Statutory holidays that might affect banking
• Year-end processing timelines

Having this calendar visible to your accounting team (even if that’s just you) ensures nothing falls through the cracks.

Automate Wherever Possible

Leverage technology to:

• Set up recurring reminders for payroll processing and remittance deadlines
• Use direct deposit to eliminate manual check processes
• Implement employee self-service portals for accessing pay stubs and tax forms
• Integrate time-tracking with payroll to reduce manual data entry

Stay Informed About Regulatory Changes

Canadian payroll regulations change frequently. Stay updated by:

• Subscribing to CRA email updates
• Joining the Canadian Payroll Association (even their free resources are valuable)
• Setting Google Alerts for payroll regulation changes in your province
• Attending annual payroll update webinars (many accounting firms offer these for free)

Invest in Training

Even if you use automated software, understanding the fundamentals of Canadian payroll is crucial:

• Take introductory payroll courses
• Familiarize yourself with the CRA’s Employer’s Guide (T4001)
• Consider Payroll Compliance Practitioner (PCP) certification for yourself or your payroll staff

I’ve seen small businesses save thousands in penalties and countless stress hours simply by investing in proper payroll training.

Common Mistakes to Avoid in Small Business Payroll Canada

When handling payroll for small business in Canada operations, be vigilant about these frequent pitfalls:

Misclassifying Workers

Employee vs. Independent Contractor confusion is the number one compliance issue I see with small businesses:

• Incorrectly classifying employees as contractors can lead to significant back taxes and penalties
• The CRA looks at factors like control, ownership of tools, opportunity for profit/risk of loss
• When in doubt, consult with an employment lawyer or accountant

Miscalculating Statutory Holiday Pay

Each province has different rules for calculating statutory holiday pay. Common errors include:

• Not providing holiday pay to eligible part-time employees
• Incorrect calculation methods based on provincial requirements
• Failing to recognize provincial holidays in addition to federal ones

Quebec Alert: Quebec has particularly strict holiday pay rules that differ significantly from other provinces.

Missing Remittance Deadlines

The consequences of late remittances are severe:

• Penalties range from 3-20% depending on how late the payment is
• Interest compounds daily on outstanding amounts
• Repeated late remittances may trigger a payroll audit

Pro Tip: Set remittance deadlines 2-3 days earlier than the actual due date in your calendar to give yourself a buffer.

Improper Record Keeping

Poor documentation can lead to serious issues during CRA reviews:

• Keep signed copies of all employee tax forms
• Document all payroll policy decisions
• Maintain detailed records of hours worked for non-exempt employees
• Save all communications with the CRA regarding your payroll account

Troubleshooting Payroll for Small Business in Canada

Even with careful planning, payroll challenges will arise. Here’s how to handle common issues in small business payroll in Canada:

Correcting Calculation Errors

If you discover a payroll calculation error:

1. Determine the extent of the error
   • Affected employees
   • Time period involved
   • Total amount of the discrepancy
2. For underpayments:
   • Issue correcting payments immediately
   • Provide clear explanation to employees
   • Adjust your next remittance accordingly
3. For overpayments:
   • Consult provincial employment standards for recovery options
   • Create a written repayment plan with the employee
   • Adjust future withholdings appropriately

Warning: There are strict rules around recovering overpayments from employees. In most provinces, you cannot simply deduct the full amount from their next paycheck without consent.

Handling CRA Notices or Inquiries

If you receive a notice from the CRA regarding your payroll:

1. Respond promptly – ignoring notices only escalates the situation
2. Gather supporting documentation before contacting the CRA
3. Take detailed notes of all communications
4. Request clarification if you don’t understand the notice
5. Consider professional representation for complex issues

Personal Experience: I once received a CRA payroll review notice that initially seemed alarming. By responding promptly with organized documentation, the matter was resolved with a simple clarification.

Managing Mid-Year Employee Changes

When employees have significant life changes:

1. Update TD1 forms for:
   • Name changes
   • Address changes
   • Changes in tax credit claims
2. Recalculate special deductions when employees:
   • Reach CPP or EI maximums
   • Begin or end benefits participation
   • Change provincial residency

Alternatives for Payroll for Small Business in Canada

There’s more than one way to handle payroll for small business in Canada operations. Consider these alternatives:

DIY Manual Payroll

Best for: Very small businesses with 1-3 employees and stable hours

Pros:

• No software costs
• Complete control over the process
• Deeper understanding of payroll mechanics

Cons:

• Extremely time-consuming
• Higher risk of calculation errors
• No automatic updates when regulations change

Cloud-Based Payroll Software

Best for: Growing businesses with 4-50 employees

Pros:

• Automatic tax updates
• Employee self-service options
• Integration with accounting systems
• Digital record keeping

Cons:

• Monthly subscription costs
• Learning curve for setup
• Potential data security concerns

Full-Service Payroll Provider

Best for: Businesses wanting to completely outsource payroll

Pros:

• Minimal time investment from your team
• Expert handling of complex situations
• Liability transfer for many compliance issues
• Year-end processing included

Cons:

• Highest cost option
• Less direct control
• Still requires oversight and review

Hybrid Approach: Accountant + Software

Best for: Businesses with periodic complexity but generally straightforward payroll

Pros:

• Professional setup and periodic review
• Day-to-day processing remains in-house
• Expert help for complex situations

Cons:

• Coordination required between systems
• Potential for miscommunication

Cost Comparison (Approximate 2025 Figures):

Mastering How to Do Payroll for Small Business in Canada

Managing payroll for small business in Canada operations doesn’t have to be overwhelming.

With the right systems, knowledge, and approach, you can turn this necessary business function into a streamlined process that supports your company’s growth.

Remember that proper payroll management goes beyond just paying employees—it’s about compliance, accuracy, and maintaining trust with both your team and government authorities.

The time you invest in setting up solid payroll practices will pay dividends through reduced stress, fewer penalties, and more time to focus on growing your business.

Whether you choose to handle payroll yourself, use software, or outsource completely depends on your specific business needs, budget, and comfort level with financial processes. The most important thing is making an informed decision and then implementing it consistently.

As your business grows, don’t hesitate to reassess your payroll for small business in Canada approach. What works for five employees might not be optimal when you reach twenty or fifty. Stay flexible, keep learning, and consider payroll as a vital business system worthy of regular review and optimization.

Frequently Asked Questions: Payroll for Small Business in Canada

Q: How often do I need to run payroll for my small business in Canada?

A: There’s no legal requirement for how frequently you must pay employees, but most common pay periods are bi-weekly (every two weeks) or semi-monthly (twice per month, usually on the 15th and last day). Your industry, cash flow, and administrative capacity will influence this decision.

Q: Do I need to register for a payroll account even if I only have one employee?

A: Yes, even with just one employee, you must register for a payroll program account with the CRA and make the required deductions and remittances.

Q: What’s the difference between T4 and T4A forms?

A: T4 slips are for employees, while T4A slips are generally used for self-employed contractors, pensioners, or for reporting other income like scholarships or research grants.

Q: How do I handle payroll for family members working in my business?

A: Family members working in your business are generally treated like any other employee, but there are some special considerations, particularly for CPP exemptions for family members under 18. Always consult with a tax professional for your specific situation.

Q: What happens if I make a mistake on my remittances to the CRA?

A: If you discover an error, correct it as soon as possible. For underpayments, remit the additional amount immediately. For overpayments, you can request a refund or apply the credit to a future remittance. Always document the correction.

Q: How do I calculate vacation pay in Canada?

A: Minimum vacation pay requirements vary by province but are typically 4% of gross earnings for employees with less than 5 years of service and 6% for those with 5+ years. Quebec, Saskatchewan, and some other provinces have different requirements, so check your provincial employment standards.

Q: Can I pay employees in cash?

A: Yes, but you still must calculate and remit all required deductions, provide pay statements, and maintain proper records. Cash payments don’t exempt you from any payroll obligations.

Q: What records should I keep for payroll and for how long?

A: Keep all payroll records including timesheets, pay calculations, copies of pay statements, TD1 forms, and records of remittances for at least 6 years from the end of the tax year to which they relate.

Read also:

• How to Register a Business in Canada: A Step-by-Step Guide for Entrepreneurs
• Best Facebook Business Groups in Canada
• Top 6 Free Payroll Software for Small Businesses in Canada