How to do payroll for a small business in Canada

Knowing how to do payroll is essential for every Canadian business. Whether you're hiring your first employee or managing a growing workforce, payroll involves more than issuing paycheques.

Employers must calculate earnings, withhold deductions, remit payroll taxes, maintain records and comply with federal and provincial requirements. Understanding payroll fundamentals can help support compliance, improve accuracy and create a better employee experience.

Key takeaways

• Payroll includes gross pay calculations, payroll deductions, remittances, employee payments, reporting and recordkeeping.
• Employers generally need a Payroll Program Account (RP) before paying employees.
• Payroll setup includes collecting employee documentation, selecting pay periods and registering for applicable programs.
• Québec employers may have additional payroll obligations through Revenu Québec.
• Accurate payroll processing and timely remittances can help reduce compliance risks.
• Payroll software and payroll service providers can help streamline payroll administration.

How payroll works in Canada

Payroll is a recurring process that includes calculating employee earnings, withholding deductions, paying employees, remitting deductions to government agencies, maintaining records and satisfying reporting requirements. Employers must also comply with federal, provincial and territorial payroll regulations.

What running payroll includes: gross pay, deductions, remittances and recordkeeping

A typical payroll cycle includes:

• Calculating employee earnings
• Processing overtime pay
• Incorporating commissions and bonuses
• Applying required deductions
• Paying employees
• Remitting source deductions
• Maintaining payroll records
• Completing year-end reporting

Canada-specific basics: CRA requirements and provincial/territorial considerations

Canadian employers are responsible for complying with requirements established by the CRA and applicable provincial or territorial employment standards legislation. Depending on the jurisdiction, employers may need to comply with specific rules related to pay frequency, overtime, payroll deductions, workers' compensation and payroll reporting.

How to set up payroll

Before processing your first payroll, it's important to establish the necessary registrations, employee records and administrative processes.

Payroll setup in Canada: what you need before your first pay run

Setting up payroll correctly can help reduce administrative challenges and create a foundation for ongoing compliance.

Step 1: Apply for a Payroll Program Account (RP)

A Payroll Program Account allows employers to remit payroll deductions and submit payroll-related information to the CRA. Most businesses will need this account before paying employees.

Step 2: Obtain a Revenu Québec business number (if operating in Québec)

Organizations with a permanent establishment in Québec may need to register separately with Revenu Québec to satisfy provincial payroll obligations.

Step 3: Collect employee documents

Collect required employee information such as:

• Social Insurance Number (SIN)
• Federal TD1 form
• Provincial or territorial TD1 form
• Direct deposit information
• Employment agreement information
• Compensation details

Step 4: Choose pay periods

Common payroll schedules include:

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

Employers should select a schedule that aligns with operational needs while satisfying applicable employment standards requirements.

Step 5: Register for workers' compensation insurance

Many provinces and territories require employers to register for workers' compensation coverage. Specific requirements vary by jurisdiction and industry.

Step 6: Offer optional benefits to employees

Employers may choose to offer:

• Health benefits
• Dental coverage
• Life insurance
• Retirement savings programs

Benefits can help strengthen employee attraction and retention efforts.

Step 7: Open a payroll bank account

A dedicated payroll account can make payroll tracking, reconciliation and tax remittances easier to manage.

What employee information do I need before running payroll?

Before each payroll cycle, employers should review employee information and payroll inputs to help ensure payroll accuracy.

Collect inputs: hours, overtime, PTO/leave, commissions/bonuses, reimbursements

Review and collect payroll inputs, including:

• Hours worked
• Overtime hours
• Vacation and paid leave
• Commissions
• Bonuses
• Expense reimbursements

Confirm employee changes: new hires, terminations, salary changes, banking updates

Review any workforce changes before payroll processing, including:

• New hires
• Employee terminations
• Pay increases
• Salary adjustments
• Benefit updates
• Banking information changes

Validate approvals and cutoffs (timesheets and manager sign-off)

Establish payroll submission deadlines and approval processes to help ensure that employee hours and payroll data are approved before payroll is processed.

How to calculate and prepare payroll

For small businesses handling payroll internally, following a structured payroll process can help improve consistency and reduce errors.

Step 1: Calculate hours worked and gross pay

Calculate employee earnings using:

• Regular hours
• Overtime hours
• Premium pay
• Bonuses
• Commissions

The total earnings amount represents gross pay.

Step 2: Process payroll deductions

After gross pay is calculated, employers apply mandatory and voluntary deductions.

How do I calculate CPP/QPP, EI, and income tax deductions?

For each pay period, calculate deductions from gross pay using current government rates, thresholds, and tax tables. Employers must calculate and withhold:

• Federal income tax
• Provincial or territorial income tax
• CPP or QPP contributions
• EI premiums
• QPIP premiums where applicable

Rates, maximums and exemptions change each year, so confirm them on the CRA (or Revenu Québec) site or use a payroll software that updates them automatically.

Step 3: Calculate net pay and pay employees

Net pay equals:

• Gross pay – deductions = net pay

Employers may pay employees by direct deposit, cheque or other permissible methods depending on jurisdictional requirements.

Step 4: File tax reports

After payroll is processed, employers must remit deductions and complete any required payroll reporting.

Step 5: Document and store payroll records

Employers should maintain payroll records, including:

• Hours worked
• Earnings
• Payroll deductions
• TD1 forms
• Remittance records
• Payroll reports

Proper recordkeeping supports payroll compliance and audit readiness.

Remit payroll deductions and file payroll reports (Canada)

Timely remittances and reporting are critical payroll responsibilities for Canadian employers.

Remit source deductions to the CRA on time (and avoid penalties)

Meeting payroll remittance deadlines can help avoid interest charges and penalties. Employers should understand their assigned remittance schedule and establish processes to ensure payments are submitted on time.

Handle Québec considerations when applicable (Revenu Québec)

Employers operating in Québec may have separate remittance and reporting obligations with Revenu Québec.

Maintain payroll records and documentation (retention basics)

Payroll records should be maintained in accordance with CRA requirements and applicable provincial legislation.

Year-end payroll in Canada: T4s and reconciliations

Year-end payroll activities help ensure accurate employee tax reporting and regulatory compliance.

Prepare and distribute T4 slips and summaries (high-level)

Employers are generally responsible for preparing and distributing year-end tax slips and filing applicable payroll information returns.

Reconcile year-to-date totals and correct errors before filing

Before filing year-end information returns, employers should review payroll balances, deductions, taxable benefits and employee earnings to identify and correct discrepancies.

How to do payroll using professional services

As organizations grow, payroll administration often becomes more time-consuming and complex. Many businesses choose to work with payroll service providers to help reduce administrative burden while supporting compliance.

How to do payroll with software in three steps

Payroll software can help simplify payroll processing by automating calculations, deductions, remittances and reporting.

Step 1: Provide payroll provider with tax information and documentation

Provide employee records, business information, payroll account numbers and applicable payroll documentation.

Step 2: Report payroll service agent authorization to the CRA

Authorize your payroll provider to perform approved payroll-related activities on your behalf.

Step 3: Process payroll

After setup is complete, payroll can be processed through a streamlined workflow designed to reduce manual administration.

Common payroll mistakes (and how to avoid them)

Payroll errors can result in compliance concerns, administrative burdens and employee dissatisfaction.

Late remittances and missed deadlines

Missing remittance deadlines can lead to penalties and interest charges.

Misclassifying employees vs contractors

Worker classification affects payroll tax obligations, deductions and reporting requirements.

Incorrect deductions, taxable benefits and recordkeeping gaps

Payroll inaccuracies can create reporting issues and increase compliance risk.

By establishing clear payroll processes and leveraging payroll technology where appropriate, employers can help reduce these risks.

Frequently asked questions