How to Handle Payroll in Your Small Business

Running a small business in Canada comes with many responsibilities, but few are as critical as managing payroll. Payroll is more than just paying your employees—it’s about staying compliant with federal and provincial regulations, managing deductions, and maintaining accurate records. If you get it wrong, you could face penalties, audits, and legal complications.

In this guide, we’ll walk you through everything you need to know about handling payroll for your small business in Canada.

What Is Payroll?

Payroll is the entire process of calculating employee compensation and managing all related deductions and remittances. It involves calculating gross pay, deducting taxes, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums, then ensuring those deductions reach the Canada Revenue Agency (CRA) on time.

As an employer, you’re legally required to withhold money from employee paychecks and remit it to the CRA. You’re also responsible for paying your own employer contributions to CPP and EI. Getting payroll right isn’t optional—it’s essential for legal compliance and employee satisfaction.

Understanding Canadian Payroll Deductions

Before you can process payroll, you need to understand what deductions are required. Canadian employers must withhold and remit four main deductions:

Federal and Provincial Income Tax

This is the most visible deduction on any paystub. The amount deducted depends on your employee’s income level, location, and personal tax credits. Each province has different tax brackets, so the rates vary depending on where your employees work.

Canada Pension Plan (CPP) Contributions

Starting in 2024, Canada introduced CPP2 (the second phase of CPP expansion). Employees and employers each contribute a percentage of earnings up to the Maximum Pensionable Earnings (YMPE). For 2025, the employee maximum contribution is $1,075 and the employer contribution is $1,508.47.

Employment Insurance (EI) Premiums

EI protects employees if they lose their job. Employers deduct a percentage of employee wages for EI, and they also contribute their own employer EI premium. These rates are set annually and vary by province.

Workers’ Compensation

While not technically a payroll deduction in all cases, workers’ compensation requirements vary by province. Some provinces, like Ontario, require employers to register with the Workplace Safety and Insurance Board (WSIB). Others have different systems. Some provinces also levy an Employer Health Tax (EHT) on large payrolls.

Understanding these deductions is crucial because you’re holding employee money in trust. Money withheld must be kept separate from your business operating account and remitted to the CRA according to the required schedule.

Step 1: Register for a CRA Payroll Account

The first step in handling payroll is registering with the Canada Revenue Agency. You’ll need:

• A Business Number (BN) for your company
• A Payroll Deductions (PD) account (usually formatted as RP0001)

You can register online through CRA’s Business Registration Online service, by phone, or by mail. Online registration typically processes immediately, giving you your BN and payroll account right away.

During registration, you’ll provide information about your business structure, the provinces where you employ people, your expected first payday, and your estimated employee count. This information helps the CRA determine your remittance frequency (monthly, quarterly, or as required by your business volume).

Step 2: Gather Employee Information

Once you’re registered, you need to collect specific information from each employee before their first payday:

• Legal name and date of birth
• Social Insurance Number (SIN)
• Home address and contact information
• Employment start date
• Position and salary or hourly rate
• Completed Form TD1 (Personal Tax Credits Return)

The TD1 form is critical—it tells you what tax credits the employee claims, which affects how much tax you deduct. Make sure each employee completes this accurately.

Keep all this information secure. The CRA requires you to maintain payroll records for at least six years, and data breaches can be costly and damaging to your business reputation. Implement strong password policies and use encrypted storage for sensitive employee information.

Step 3: Choose Your Payroll Processing Method

You have three main options for processing payroll:

Manual Spreadsheets

Using Excel or Google Sheets, you calculate all deductions manually based on current CRA rates and tax tables. This method is cost-effective for very small businesses but extremely time-consuming and error-prone. You’ll need to stay updated on changing tax rates, CPP contributions, EI premiums, and provincial regulations.

External Bookkeeper or Accountant

Hiring a professional like those at Nova Ledgers means outsourcing all payroll calculations, remittances, and tax slip preparation. You provide hours worked and employee information, and they handle everything else. This method is reliable and reduces errors, though it comes with monthly fees.

Payroll Software

Cloud-based payroll software automates calculations, tracks deductions, and often integrates directly with CRA systems for automatic remittance. Software like QuickBooks Online, Wagepoint, and ADP automatically updates tax rates and ensures compliance. This approach is scalable, accurate, and increasingly popular among Canadian small businesses.

For most growing small businesses, payroll software offers the best balance of cost, accuracy, and time savings.

Step 4: Set Up Your Pay Schedule

Decide how often you’ll pay employees. Common options include:

• Weekly
• Bi-weekly
• Semi-monthly
• Monthly

Your choice affects how frequently you remit deductions to the CRA. The CRA doesn’t let you choose your own remittance frequency based on pay schedule—they assign it based on your payroll volume and business type. Most new small businesses start as regular monthly remitters.

Whatever schedule you choose, consistency is key. Missed paydays damage employee morale and can violate employment standards.

Step 5: Calculate and Process Payroll

For each pay period, follow this process:

1. Calculate Gross Pay

Determine how much each employee earned based on hours worked (for hourly employees) or salary (for salaried employees).

2. Calculate Deductions

Using current tax tables and rates, calculate federal and provincial income tax, CPP, EI, and any other deductions specific to your business (like health benefits or garnishments).

3. Determine Net Pay

Subtract all deductions from gross pay to calculate the amount the employee actually receives.

4. Create Paystubs

Provide each employee with a detailed paystub showing gross pay, each deduction, and net pay. Paystubs should be issued before or on payday and should be kept for your records.

5. Record in Financial Accounts

Record the payroll transaction in your accounting system, including wages paid and all employer contributions. This ensures accurate financial reporting.

Step 6: Remit Deductions to the CRA

Deducted amounts belong to the government, not your business. You must remit them according to your assigned schedule—typically monthly, but more frequently for larger payrolls.

You can remit through:

• CRA My Business Account (online)
• Your bank’s online banking system
• Direct deposit

Late remittances result in interest charges and penalties. The CRA takes payroll compliance seriously, and penalties can accumulate quickly.

Step 7: File Year-End Forms

At the end of each calendar year, you have additional reporting obligations:

T4 Slips

By February 28, you must prepare and distribute T4 slips to each employee showing their total earnings and all deductions. You must also file copies with the CRA.

Record Retention

Keep all payroll records—including timesheets, pay stubs, and tax remittance documents—for at least six years. Some provinces may have longer retention requirements.

Common Payroll Mistakes to Avoid

Not Staying Updated on Tax Changes

Tax rates, CPP contribution limits, and EI premiums change annually. Failure to update these creates errors that cascade through the year.

Misclassifying Workers

Treating an employee as a contractor doesn’t exempt you from payroll deductions. The CRA has specific criteria for determining worker status, and misclassification can result in back payments and penalties.

Keeping Inaccurate Records

Poor record-keeping isn’t just disorganized—it’s illegal. The CRA can audit your payroll, and missing or incomplete records can result in fines and prosecution.

Missing Remittance Deadlines

Late remittances trigger interest and penalties that compound over time. Set reminders and automate the process if possible.

Not Separating Payroll Deductions

Never mix deducted amounts with your business operating funds. Keep payroll deductions in a separate account until remitted.

Why Professional Help Matters

Many small business owners try to manage payroll themselves to save money. However, the complexity of Canadian payroll regulations, combined with the consequences of errors, often makes professional help the smarter investment.

A professional bookkeeper or payroll service provider stays updated on all regulatory changes, ensures timely remittances, prepares accurate tax documents, and protects your business from penalties and audits.

If your business is growing or you simply don’t have time to manage payroll accurately, outsourcing to a trusted professional is a wise decision.

Conclusion

Handling payroll in your small business requires understanding deductions, registering with the CRA, choosing the right processing method, and maintaining meticulous records. While it’s possible to manage payroll yourself, many Canadian small business owners find that investing in professional payroll services or software saves time, reduces errors, and ensures compliance.

By following these steps and staying informed about Canadian payroll regulations, you’ll create a solid foundation for paying your employees accurately while meeting all legal obligations. Your employees deserve reliable, accurate paychecks, and your business deserves the peace of mind that comes with proper payroll management.