How to Run Payroll in Canada: A Step-by-Step Guide for Small Business

Running payroll in Canada is one of those tasks that seems simple until you're actually doing it. Calculating wages is the easy part. The complexity lives in the deductions, remittances, year-end filings, and the provincial variations that make every payroll slightly different depending on where your employees are located.

This guide walks through the entire process, from registering with CRA to filing your year-end documents. It's written for small business owners who are setting up payroll for the first time or who inherited a payroll process that nobody fully understands.

Before You Start: CRA Registration

Before you can run payroll, you need a payroll account with the Canada Revenue Agency. This is non-negotiable -- you cannot legally pay employees without one.

Understanding the Deductions

Every payroll run requires you to calculate and withhold four categories of deductions from employee pay. Getting these calculations right is the most critical part of payroll processing.

Canada Pension Plan (CPP)

CPP is a mandatory pension contribution shared between employer and employee. Both the employer and employee contribute the same amount.

How it works: CPP applies to pensionable earnings between the basic exemption ($3,500 annual) and the first earnings ceiling (updated annually by CRA). For earnings above the first ceiling up to the second ceiling, a higher contribution rate applies (CPP2). You must withhold the employee portion and match it with an equal employer contribution.

Key details to track:

• The annual maximum pensionable earnings and contribution rates change every year -- always use the current year's figures from CRA
• Employees under 18 or over 70 are generally exempt from CPP
• Employees aged 65 to 70 who are receiving a CPP retirement pension may file a CPT30 election to stop contributing. Once filed, you stop withholding the employee CPP contribution and stop your employer match for that worker -- keep the signed CPT30 on file
• If an employee works for multiple employers and over-contributes, they claim the excess back on their personal tax return -- but you still withhold based on the earnings you pay

Quebec exception: If your employee works in Quebec, the Quebec Pension Plan (QPP) replaces CPP. QPP has its own contribution rates and maximums, administered by Revenu Québec.

Employment Insurance (EI)

EI premiums fund employment insurance benefits for workers who lose their jobs, take parental leave, or are unable to work due to illness.

How it works: Both the employer and employee contribute, but the employer's share is larger. The standard employer premium is 1.4 times the employee's premium. EI applies to insurable earnings up to the maximum insurable earnings for the year.

Key details:

• Like CPP, the maximum insurable earnings and premium rates are updated annually
• Some employees may be exempt from EI (for example, employees who are related to the employer and don't deal at arm's length)
• In Quebec, EI still applies but at a reduced rate, because Quebec administers its own parental insurance program (QPIP) in addition to federal EI -- QPIP does not replace EI

Federal Income Tax

You must withhold federal income tax from every payment to an employee based on their taxable income and the tax credits claimed on their TD1 form.

How it calculates: Federal income tax uses a graduated bracket system. The tax brackets and rates are updated annually. The employee's TD1 form tells you their personal tax credit amount, which reduces the amount of tax you withhold. CRA publishes payroll deduction tables (T4032) that you can use to look up the correct withholding amount based on pay period, income, and claim code.

Practical note: Do not try to calculate federal tax manually using the bracket rates alone. The payroll deduction tables account for the CPP and EI deductions, personal credits, and annualization of pay period amounts. Use the tables, CRA's Payroll Deductions Online Calculator (PDOC), or payroll software that implements CRA's formulas.

Provincial and Territorial Income Tax

In addition to federal income tax, you must withhold provincial or territorial income tax based on the employee's province of employment. Each province has its own tax brackets, rates, and surtaxes.

How it works: The employee completes a provincial TD1 form indicating their provincial personal tax credits. Provincial tax is calculated separately from federal tax, with its own brackets and rates. CRA's payroll deduction tables include combined federal/provincial amounts for each province.

The Quebec difference: Quebec administers its own provincial income tax system separately from CRA. If you have employees in Quebec, you must register with Revenu Quebec, use Quebec's TP-1015.3-V form (instead of the federal TD1), and remit Quebec provincial tax directly to Revenu Quebec rather than to CRA. You also must withhold QPIP (Quebec Parental Insurance Plan) contributions, which is a separate deduction from EI.

Running Your Payroll

With registration complete and deductions understood, here's what a typical pay run looks like.

Before Each Pay Run

1. Confirm hours and earnings. Collect timesheets, verify salary amounts, and account for any overtime, bonuses, commissions, or taxable benefits.
2. Calculate gross pay. Total all earnings for the pay period, including regular pay, overtime, and taxable benefits.
3. Calculate deductions. Using CRA's payroll tables or PDOC, determine the CPP, EI, federal tax, and provincial tax to withhold. Add any voluntary deductions (RRSP contributions, union dues, etc.).
4. Calculate net pay. Gross pay minus all deductions equals the amount you deposit to the employee's bank account.
5. Prepare pay statements. Every employee must receive a pay statement showing gross earnings, each deduction, and net pay.

Taxable Benefits

This is where many small businesses make mistakes. Certain benefits you provide to employees are considered taxable income and must be included in the deduction calculations. Common taxable benefits include:

• Company-paid life insurance premiums above the basic exemption
• Personal use of a company vehicle
• Employer-paid parking (in some cases)
• Gift cards (always taxable, regardless of amount)
• Certain employer-paid education
• Housing or board and lodging (in some cases)

If you provide any non-cash benefits to employees, check CRA's guide on taxable benefits (T4130) to determine whether they need to be included in payroll calculations. Failing to include taxable benefits results in under-withholding, which creates a liability for both you and the employee.

Remittance Schedules

After you withhold deductions, you must remit them to CRA on a schedule determined by your remitter type. This is one of the most common areas where small businesses make costly mistakes.

Remitter Types and Due Dates

New employers with no payroll history typically start as regular remitters. CRA will reassess your remitter type based on your actual withholding amounts after the first year.

How to Remit

You can remit payroll deductions through:

• CRA My Business Account -- online payment
• Your financial institution -- online banking, in person, or by mail using Form PD7A
• Pre-authorized debit -- set up automatic payments through CRA My Business Account

The remittance amount includes: total employee CPP deductions plus employer CPP match, total employee EI deductions plus employer EI contribution (1.4x), and total federal and provincial income tax withheld. You submit one combined payment to CRA covering all deductions.

Quebec exception again: If you have Quebec employees, you remit Quebec provincial income tax, QPP contributions, and QPIP premiums to Revenu Quebec separately. Federal tax, EI, and the federal portion of CPP are still remitted to CRA.

Year-End Obligations

The end of every calendar year brings a set of mandatory filings. Miss these deadlines and you face penalties.

T4 Slips

By the last day of February, you must prepare and file a T4 slip for every employee who received employment income during the calendar year. The T4 reports:

• Total employment income
• CPP contributions (employee and employer)
• EI premiums (employee and employer)
• Income tax deducted
• Taxable benefits
• Other employment income and deductions

You must provide two copies to the employee and file electronically with CRA. Electronic filing is mandatory if you have more than 5 T4s -- a threshold that dropped from 50 in 2024, catching many small employers off-guard their first year over the line.

T4 Summary

Along with the individual T4 slips, you file a T4 Summary that totals all the amounts across all T4s. This is a reconciliation document that must match your total remittances for the year. If there's a discrepancy, you either owe CRA additional remittances or are owed a refund.

Records of Employment (ROE)

ROEs are not a year-end filing per se, but they're a critical ongoing obligation. Service Canada's deadlines depend on filing method. Paper ROEs are due within 5 calendar days of the first day of an interruption of earnings. ROE Web filers have until the 5th calendar day after the end of the pay period in which the interruption occurred, or 15 calendar days after the first day of interruption, whichever is earlier.

An interruption of earnings includes termination, resignation, layoff, maternity or parental leave, illness, or any other reason an employee stops working.

ROEs are typically filed electronically through Service Canada's ROE Web system. The ROE reports the employee's insurable earnings and hours, which Service Canada uses to determine EI benefit eligibility.

Common ROE mistakes: Filing late (penalties apply), reporting incorrect insurable hours, using the wrong reason code for the separation, and not filing an ROE for employees who reduce hours below minimum thresholds.

Common Payroll Mistakes and How to Avoid Them

After covering the full process, here are the mistakes that catch small businesses most often.

Using Last Year's Tax Tables

CRA updates payroll deduction tables every January 1. CPP rates, EI premiums, tax brackets, and personal credit amounts all change. If you're calculating deductions manually or using spreadsheets, you must update your figures at the start of every year. Using outdated tables results in incorrect withholding, which creates headaches at year-end for both you and your employees.

Forgetting Provincial Differences

A remote team with employees across multiple provinces means multiple sets of provincial tax rates, and potentially different programs (QPP/QPIP for Quebec, provincial health premiums for Ontario, etc.). Each employee's deductions must be calculated based on their province of employment. A one-size-fits-all approach guarantees errors.

Misclassifying Workers

Treating an employee as an independent contractor to avoid payroll obligations is one of the most consequential mistakes a business can make. CRA examines the relationship based on control, ownership of tools, chance of profit, risk of loss, and integration into the business. If CRA determines a worker was misclassified, you owe back CPP, EI, and potentially penalties and interest going back to the start of the relationship.

Not Tracking Taxable Benefits

Many small businesses provide benefits -- cell phone allowances, company vehicles, parking -- without including them in payroll calculations. If CRA audits your payroll and finds unreported taxable benefits, you'll face reassessments, penalties, and a lot of retroactive paperwork.

Late Remittances

It bears repeating: CRA's penalty structure for late remittances is aggressive. A regular remitter who is consistently a week late pays a 10% penalty each time. Over a year of monthly remittances, that adds up to a significant amount. Automate your remittance process wherever possible.

When to Get Help

You can run payroll manually as a small business owner. Many do, especially in the early days. But there's a team size and complexity threshold where the risk of mistakes outweighs the cost of professional help or software.

Consider getting help when:

• You have employees in multiple provinces. The complexity of managing different provincial rates, programs, and remittance schedules multiplies with each province.
• You're spending more than a few hours per pay period on payroll. That time has a cost, and payroll services or software typically cost less.
• You've made a deduction or remittance error. One error is a learning experience. Repeated errors are a sign that the process needs better support.
• You're growing past 10-15 employees. At this size, manual payroll becomes a significant time commitment and the stakes of errors increase.

Payroll software or a payroll service provider can automate calculations, generate remittance forms, file T4s, and keep you on schedule. For the HR side of the equation -- employee records, time-off tracking, onboarding, and document management -- a dedicated HR platform like WalnutsHR complements your payroll solution by keeping your people data organized and accessible.

For teams evaluating their options, see our pricing page and our guide on the best HR software for Canadian businesses.

Keep your HR organized while your payroll runs smoothly. Get started free with WalnutsHR and pair it with the Canadian payroll provider of your choice.