Payroll for Small Business in Canada: A Complete Guide

Getting Started with Payroll in Canada

Hiring your first employee is an exciting milestone — and a significant compliance responsibility. From the moment you issue a first paycheque, you are legally required to calculate and remit source deductions to CRA, file payroll reports on time, and issue T4 slips every February.

This guide covers everything a Canadian small business owner needs to know to run payroll correctly from day one.

Step 1: Register as an Employer with CRA

Before you pay your first employee, you must register for a Payroll Account with the Canada Revenue Agency. This is separate from your Business Number (BN) registration — it adds a "RP" account to your BN (e.g., 123456789 RP 0001).

Register through CRA My Business Account online or by calling CRA's business line. Registration takes 5–10 business days to process.

Step 2: Understand the Three Source Deductions

Every paycheque requires three deductions from the employee's gross wages:

1. Canada Pension Plan (CPP) Contributions Both the employee and the employer contribute to CPP. The employee's share is deducted from their wages; the employer matches it dollar-for-dollar.

2026 CPP rates: - Employee contribution rate: 5.95% of pensionable earnings - Employer contribution rate: 5.95% (matching the employee) - Annual maximum pensionable earnings: $71,300 - Basic exemption: $3,500

CPP2 — A second tier of CPP contributions applies to earnings between $71,300 and $81,900 at a rate of 4% for both employee and employer.

2. Employment Insurance (EI) Premiums EI premiums are also split between employee and employer, but the employer pays more.

2026 EI rates: - Employee premium rate: 1.64% of insurable earnings - Employer premium rate: 2.296% (1.4x the employee rate) - Annual maximum insurable earnings: $65,700

3. Federal Income Tax Federal income tax is withheld based on the employee's TD1 form (Personal Tax Credits Return) and CRA's payroll deduction tables. The amount depends on: - Gross wages - Pay frequency (weekly, bi-weekly, semi-monthly, monthly) - Total personal tax credits claimed on the TD1

Most payroll software calculates this automatically using CRA's tables.

Step 3: The TD1 Form

Every new employee must complete two TD1 forms: - Federal TD1 — determines federal personal tax credits - Provincial TD1 — determines provincial personal tax credits

The basic personal amount for 2026 is approximately $16,129 federally. Employees with no other credits simply claim the basic amount. Those with additional credits (disability, tuition transfer, caregiver amounts) claim higher totals, resulting in less income tax withheld per paycheque.

Keep TD1 forms on file — CRA can request them during an audit.

Step 4: Calculate Each Paycheque

For each pay run, calculate:

Gross Pay (hours × rate, or salary ÷ pay periods)

Deductions: - Employee CPP contribution - Employee EI premium - Federal income tax - Provincial income tax (where applicable)

Net Pay = Gross Pay – All Deductions

Employer Obligations (not deducted from employee, paid by employer): - Employer CPP match - Employer EI premium (1.4× employee EI)

Example — Ontario employee, bi-weekly pay of $2,000 gross: | Item | Amount | |---|---| | Gross pay | $2,000.00 | | Employee CPP | -$111.04 | | Employee EI | -$32.80 | | Federal income tax | -$229.15 | | Ontario provincial tax | -$72.40 | | Net pay to employee | $1,554.61 | | Employer CPP (matching) | $111.04 | | Employer EI (1.4×) | $45.92 | | Total employer cost | $2,156.96 |

Step 5: Remit to CRA on Time

After each pay run, you must remit the following to CRA by the deadline: - Employee CPP + Employer CPP - Employee EI + Employer EI - Employee income tax withheld

Remittance deadline for new/small employers: 15th of the month following the pay period.

For example: wages paid in March 2026 → remit by April 15, 2026.

Penalties for late remittance: - 3% if 1–3 days late - 5% if 4–5 days late - 7% if 6–7 days late - 10% if more than 7 days late (or repeat failure) - 20% for wilful non-compliance

These penalties are in addition to interest charged at CRA's prescribed rate. Payroll penalties are among the most aggressively enforced CRA penalties for small businesses.

Step 6: Record Payroll in Your Books

Every pay run needs a bookkeeping entry that records: - Gross wages (expense) - Employee deductions (liability — owed to CRA) - Employer contributions (expense) - Net pay (reduces cash/bank account)

When you remit to CRA, the liability accounts are cleared. Your bookkeeper handles these entries as part of your monthly services.

Step 7: File T4 Slips by February 28

At year-end, you must: 1. Prepare a T4 slip for each employee showing annual gross wages and all deductions 2. Distribute T4 slips to employees by February 28 3. File the T4 Summary with CRA by February 28

T4 slips can be prepared and filed through CRA My Business Account (online) or payroll software.

Late filing penalties: | Number of slips filed late | Penalty | |---|---| | 1–5 | $100 | | 6–10 | $250 | | 11–50 | $500 | | 51–500 | $1,500 |

Employee vs. Independent Contractor

Before hiring, decide whether the worker is an employee or a self-employed contractor. This is one of the most audited areas by CRA.

Signs of employment: - You control when and how the work is done - You provide the tools and equipment - The worker cannot subcontract or hire others - The worker has no financial risk

Signs of self-employment: - Worker sets their own hours and methods - Worker uses their own tools - Worker invoices you and can work for other clients - Worker bears financial risk (can profit or lose)

If CRA determines a contractor was actually an employee, you owe back CPP, EI, and income tax — often going back 3–4 years — plus penalties and interest.

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