Payroll Guide for Small Business Owners in Canada 2025

Running payroll correctly is one of the most compliance-critical tasks for any Canadian small business. Mistakes with source deductions, late remittances, or incorrect T4 slips can trigger CRA penalties, interest, and audits. This guide walks through everything you need to know to set up and manage payroll in Canada for 2025.

The Three Source Deductions

Every time you pay an employee, you must withhold three types of deductions from their gross pay and remit them (plus the employer's share of CPP and EI) to the CRA:

1. Canada Pension Plan (CPP)

CPP contributions fund retirement, disability, and survivor benefits. In 2025:

CPP Detail	2025 Amount
Basic personal exemption	$3,500/year
Maximum pensionable earnings (CPP1)	$71,300
CPP1 employee contribution rate	5.95%
CPP1 employer contribution rate	5.95% (matches employee)
Maximum CPP1 employee contribution	$4,034.10
CPP2 earnings ceiling	$81,900
CPP2 contribution rate	4% (employee + employer)

2. Employment Insurance (EI)

EI provides income replacement during unemployment, maternity/parental leave, and illness:

EI Detail	2025 Amount
Maximum insurable earnings	$65,700
Employee EI premium rate	1.64%
Employer EI premium rate	2.296% (1.4× employee rate)
Maximum employee EI premium	$1,077.48
Maximum employer EI premium	$1,508.47

3. Federal and Provincial Income Tax

Income tax is withheld based on the employee's TD1 form (Personal Tax Credits Return), pay frequency, and gross earnings. Use the CRA's payroll deductions online calculator (canada.ca/payroll-deductions) or payroll software to calculate the correct amount for each pay period.

Self-Employed CPP: Both Sides

If you're self-employed (sole proprietor or operating through a corporation paying yourself as an owner-operator without a payroll), you pay both the employee AND employer share of CPP on your net self-employment income. In 2025, the combined rate is approximately 11.9% on net self-employment income between $3,500 and $71,300 — capped at ~$8,068.20 for CPP1.

Payroll Remittance Schedule

How often you remit source deductions to the CRA depends on your average monthly withholding from two years ago:

Remitter Type	Average Monthly Withholding	Remittance Frequency
New employer / small remitter	Under $25,000	Monthly (by 15th of following month)
Regular remitter	$25,000–$99,999	Monthly (by 15th of following month)
Quarterly remitter	Under $3,000 (eligible small employers)	Quarterly
Accelerated remitter (Threshold 1)	$25,000–$99,999	Twice monthly
Accelerated remitter (Threshold 2)	$100,000+	Weekly

Late Remittance Penalties: The CRA takes late remittances very seriously. Penalties range from 3% (1–3 days late) to 10% (7+ days late) of the amount owing, and directors of corporations can be held personally liable for unremitted source deductions.

Step-by-Step Payroll Setup for New Employers

Register for a payroll account with the CRA (add a payroll (RP) account to your Business Number at canada.ca)
Collect TD1 forms from each employee (federal TD1 and provincial TD1)
Calculate gross pay based on salary or hourly rate and hours worked
Calculate source deductions using the CRA's calculator or payroll software
Issue pay stubs showing gross pay, each deduction, and net pay
Remit source deductions to the CRA by your due date
Issue T4 slips to employees by the last day of February each year
File T4 Summary with the CRA by the last day of February

T4 Slips: What You Need to Know

T4 (Statement of Remuneration Paid) slips must be issued to every employee who received remuneration in the calendar year. Key T4 boxes for small businesses:

Box 14: Employment income (gross)
Box 16: Employee CPP contributions
Box 18: Employee EI premiums
Box 22: Income tax deducted
Box 40: Taxable allowances and benefits
Box 52: Pension adjustment (if applicable)

T4 slips and the T4 Summary must be filed with the CRA electronically if you have more than 5 employees. File by the last day of February following the tax year.

Payroll Software for Canadian Small Businesses

Software	Starting Price	Best For
Wagepoint	~$20/month + per employee	Small teams, CRA integration
Humi	~$8/employee/month	HR + payroll combined
QuickBooks Payroll	~$25/month + per employee	Existing QuickBooks users
ADP Run	Custom pricing	Growing businesses
Ceridian Dayforce	Custom pricing	Mid-size to enterprise

Owner-Manager Payroll: If you're the sole owner of an incorporated business, you can pay yourself via payroll (salary) or dividends. Salary creates CPP contributions and RRSP room; dividends are simpler but don't create RRSP room. Many owner-managers use a combination of both — consult your CPA for the optimal split.

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