Updated: April 2025  |  bremo.io financial guides

Payroll Basics for Small Businesses in Canada

When your freelance business grows to the point of hiring employees, payroll becomes one of your most important compliance obligations. Canadian payroll law requires you to deduct income tax, CPP, and EI from employee pay, match CPP and EI contributions as an employer, remit everything to the CRA on time, and issue T4 slips annually. Getting any of this wrong can trigger penalties, interest, and CRA attention.

This guide covers everything a small Canadian employer needs to know about running payroll correctly.

Step 1: Register for a Payroll Account

Before you can run payroll, you need a CRA payroll account number. This is a 15-character number in the format 123456789 RP 0001. If you already have a Business Number (BN), adding a payroll account is straightforward — log into My Business Account on the CRA website or call 1-800-959-5525.

Register before your first payroll date — ideally at least a month in advance.

Step 2: Collect New Employee Information

Before issuing a first paycheque, collect:

• Completed TD1 form (Personal Tax Credits Return) — federal
• Completed TD1 provincial form for your province
• SIN (Social Insurance Number)
• Date of birth (relevant for CPP exemptions near retirement age)
• Banking information for direct deposit

The TD1 tells you what personal tax credits the employee is claiming, which affects how much income tax you withhold. Employees must complete this form when starting and whenever their credits change.

Step 3: Calculate Deductions

Each pay period, you calculate and deduct three things:

Income Tax

Use the CRA's payroll deductions tables (available at canada.ca/en/revenue-agency/services/e-services/e-services-businesses/payroll-deductions-online-calculator.html) or payroll software to calculate the correct amount based on the employee's TD1 claims, pay period, and province.

CPP (Canada Pension Plan)

Deduct CPP at the employee rate (approximately 5.95% in 2025) on insurable earnings between the basic exemption and the YMPE. As employer, you match this amount dollar-for-dollar. CPP deductions stop once the employee reaches the annual maximum.

EI (Employment Insurance)

Deduct EI at the employee rate (approximately 1.66% in 2025) on insurable earnings up to the annual maximum insurable earnings (~$65,700 in 2025). As employer, you pay 1.4 times the employee's EI deduction.

Step 4: Issue Paycheques

Pay frequency can be weekly, bi-weekly, semi-monthly, or monthly — your choice, but be consistent. The paycheque (or direct deposit) should show:

• Gross pay
• Each deduction itemized (income tax, CPP, EI)
• Net pay
• Year-to-date totals

A pay stub for every pay period is required by most provincial employment standards laws.

Step 5: Remit to CRA

You must remit the deducted amounts plus your employer contributions to the CRA. Remittance frequency depends on your average monthly withholdings:

• Regular (new employers): By the 15th of the following month
• Quarterly: For very small payrolls (under $3,000/month average) — 4 times per year
• Accelerated: For larger payrolls — more frequent (twice monthly or weekly)

Late remittances trigger automatic penalties starting at 3% and scaling up to 10% for repeated late payments. CRA takes payroll remittances seriously — directors of corporations can be held personally liable for unremitted payroll deductions.

Step 6: Year-End — T4 Slips and T4 Summary

By the last day of February each year, you must:

• Issue a T4 slip to each employee showing annual income and deductions
• File a T4 Summary with the CRA reporting all employee T4 amounts

T4s can be filed electronically through CRA's My Business Account. Penalties apply for late filing.

Provincial Employment Standards

Beyond federal payroll rules, each province has employment standards legislation covering minimum wage, vacation pay, overtime, statutory holidays, and termination notice. These are your obligations as an employer regardless of what your employment contract says. Check your province's employment standards office for current requirements.

Payroll Software Options

Manual payroll is error-prone. Most small employers use software:

• Wagepoint — popular Canadian payroll software, handles all deductions and T4s
• Humi — Canadian HR and payroll platform
• QuickBooks Payroll — integrates with QuickBooks accounting
• Payworks — strong for small-to-medium businesses
• CRA's free tools — the Payroll Deductions Online Calculator handles calculations if you prefer to run payroll manually