How to Do Payroll in Canada: A Guide for Small Business

You’ve started your business, you’ve hired your first employee, and things are moving. It’s an exciting time. Then it hits you — the reality of payday and the need for proper payroll compliance.

Suddenly, you’re faced with tax deductions, remittances, and government forms. Figuring out how to do payroll in Canada can feel like a huge challenge at first, but it’s a common feeling for new business owners.

You aren’t just paying someone; you’re handling their payroll taxes, pension plan contributions, and more. This guide breaks down the steps for how to do payroll in Canada.

Before You Start: Essential First Steps

Before you calculate that first paycheck, you need a few things in place. Taking care of this setup now will save you a lot of trouble later. Think of it as building a solid foundation for your Canada payroll system.

Get Your Business and Payroll Numbers

First, you need a Business Number (BN) from the Canada Revenue Agency (CRA). A BN is a nine-digit number that identifies your business for all tax matters with the federal government. Most businesses already have one for GST/HST or corporate income tax.

Once you have a BN, you must register for a payroll program account with the Revenue Agency. This specific account set will add a two-letter, four-digit payroll reference (like ‘RP0001’) to your existing business number. This unique payroll account is specifically for making your payroll remittance of source deductions.

Gather Employee Information

You can’t process payroll without key details from your employees, so make this part of your onboarding. Every new hire needs to provide their Social Insurance Number (SIN). It is illegal to employ someone without a valid social insurance number.

You also need them to fill out a federal Form TD1, Personal Tax Credits Return, and a corresponding provincial TD1 form. These forms tell you what claim codes to use. For 2026, you’ll apply these against the new 14% federal rate for the lowest income bracket (up to $58,523), ensuring you don’t over deduct from your team. If an employee does not complete a TD1, you must deduct tax as if they have no personal tax credits, which means taking more than necessary.

Understand Employment Standards

Each province and territory has its own employment standards legislation, often called labour standards. This covers critical areas like minimum wage, overtime pay, statutory holidays, and vacation pay. It’s your responsibility as an employer to follow the rules for your jurisdiction.

For example, overtime might start after 8 hours in a day in one province but 44 hours in a week in another. You can find these rules on your provincial or territorial government’s labor website. Knowing this is essential for calculating correct pay and maintaining payroll compliance.

A Step-by-Step Guide for How to do Payroll in Canada

Once you’ve done the prep work, you can start running payroll. The regular cycle boils down to a repeating process. Let’s walk through the steps one by one.

Step 1: Set Your Pay Period

First, decide how often you’ll pay your employees. Common pay periods in Canada include weekly, bi-weekly (every two weeks), semi-monthly (twice a month), and monthly. The choice often depends on your industry, administrative capacity, and cash flow.

Bi-weekly is a popular option, resulting in 26 paydays per year, while semi-monthly results in 24. Once you choose a pay period and establish clear payment dates, stick to it. Consistency in your processing times makes things easier for you and your employees.

Step 2: Calculate Gross Pay

Gross pay is what an employee earns before any deductions. The calculation is different for hourly and salaried employees. This amount is the starting point for the entire payroll process.

For hourly employees, you multiply their hourly rate by the number of hours worked in the pay period. You must accurately track all work hours and include any overtime at the correct premium rate as defined by local labour standards. For salaried employees, you simply divide their annual salary by the number of pay periods in the year.

Step 3: Figure Out the Deductions

This is often the most complex part of processing payroll. There are mandatory statutory deductions and potentially some voluntary ones. You are legally required to withhold and remit these amounts on behalf of your employees.

Canada Pension Plan (CPP) and CPP2 Contributions

The government requires you to deduct Canada Pension Plan contributions from pensionable earnings to fund retirement, disability, and survivor benefits. In 2026, the CPP system operates in two distinct tiers:

• For standard CPP, you deduct 5.95% from an employee’s pay up to the first earnings ceiling of $74,600. The maximum employee contribution for this tier is $4,230.45 for the year.
• For CPP2 (Second Additional Contribution), if your employee earns more than $74,600, you must deduct an additional 4% on any earnings between $74,600 and $85,000. The maximum contribution for this second tier is $416.00.

As the employer, you are responsible for a 1:1 match. This means you must contribute the exact same amount as the employee for both the standard CPP and the CPP2 tranches. These deductions are mandatory for most workers over 18 in Canada, outside of Quebec.

Employment Insurance (EI) Premiums

Employment Insurance (EI) provides temporary income support for people who lose their jobs or are unable to work due to illness, pregnancy, or caring for a family member. For 2026, the EI premium rate is 1.63% on insurable earnings up to a maximum of $68,900. This means the maximum annual employee premium for the year is $1,123.07. You must deduct the EI premium from each dollar of an employee’s insurable earnings, up to an annual maximum. Correctly calculating these insurance premiums is a key part of your duties.

Like the Canada Pension, you also have an employer portion to consider. As the employer, you must contribute 1.4 times the amount of the employee’s EI premiums. These deductions help fund important insurance benefits for workers across the country.

Income Tax Deductions

Finally, you must deduct federal and provincial income tax from an employee’s pay. The amount of these tax deductions is based on the employee’s TD1 forms. It’s important to note that for 2026, the federal rate for the first bracket has dropped from 15% to 14%, providing a bit of tax relief for your employees. This payroll tax is often the largest deduction from an employee’s check.

Calculating the correct tax income amount is crucial. The CRA provides a free Payroll Deductions Online Calculator to help you with these calculations. It’s a great tool for ensuring your numbers for CPP, EI, and income tax are accurate.

Other Potential Deductions

You may also have other deductions to handle based on your benefits package or agreements. These can include payments for company health or dental benefits. They might also include Registered Retirement Savings Plan (RRSP) or other pension plan contributions and union dues.

Step 4: Calculate Net Pay and Prepare the Pay Stub

Net pay, or take-home pay, is what’s left after all source deductions. The formula is simple: Gross Pay – Total Deductions = Net Pay. This is the actual amount you transfer to your employee’s bank account.

You must also provide a pay stub or statement of earnings with each payment. This statement lists the gross pay, each specific deduction, and the net pay for the period. It’s an important record for both you and your employee.

Step 5: Pay Your Employees

With all the calculations done, it’s finally time to pay your team. The most common method today is direct deposit. It’s fast, secure, and creates an easy-to-follow electronic record of payment.

You can also use traditional cheques. Some businesses, especially those with just a few employees, still prefer this method. No matter how you pay, make sure it’s on the agreed-upon payday.

Step 6: Remit Your Deductions to the CRA

This last step is extremely important for payroll compliance. All the deductions you withheld (CPP deductions, EI deductions, and income tax), plus your share of CPP and EI premiums as an employer, must be sent to the CRA. This payment is called a payroll remittance. The CRA will tell you how often you need to remit your payroll remittances, which is based on your total payroll amount. For new employers, this is typically due by the 15th of the month following the month you paid your employees. Late tax payments result in significant penalties and interest, so you really want to avoid that.

Provincial and Territorial Differences Matter

While federal rules for the Canada Pension Plan and Employment Insurance are the same across most of the country, many payroll rules vary by location. This is because employment law falls under provincial jurisdiction. You need to follow the rules where your employee actually works.

Key differences include minimum wage, overtime calculations, statutory holiday pay, and provincial income tax rates.

Quebec, for instance, has its own Quebec Pension Plan (QPP) and Quebec Parental Insurance Plan (QPIP).

What’s required in Alberta might be different from what’s needed in Ontario or Nova Scotia, so always check with your local labor ministry for current standards.

Year End Payroll Duties

Your payroll responsibilities don’t stop with the last paycheque of the year. There are a few important tasks to complete after December 31st. These duties wrap up the year and prepare you for the next tax season.

You must complete a T4 slip for every employee who worked for you during the year. The T4 shows the total amount they earned and how much was deducted for things like CPP, EI, and income tax. These must be given to employees and filed with the CRA by the last day of February.

Along with the individual T4 slips, you need to file a T4 Summary. This form reports the totals from all the T4s you issued for the year. The summary must perfectly match the total deductions you remitted to the Canada Revenue Agency throughout the year.

Keeping Accurate Payroll Records

Maintaining clear and accurate payroll records is not just good practice; it is a legal requirement. The CRA can request to see your records at any time to verify your payroll remittances. Good record-keeping makes this process smooth and stress-free.

You must keep records at your place of business for a period of six years from the end of the last tax year they relate to. This includes all employee information like their name, address, and social insurance number. It also includes TD1 forms, hours worked, pay rates, and details of every payment and deduction made.

Properly keeping records will protect you during an audit and help you answer any questions from employees about their pay. It is a fundamental part of a sound payroll process.

Payroll Software vs Manual Methods

So, should you use a payroll service or do all of this with spreadsheets and a calculator?

Doing payroll manually is possible, especially with only one or two employees. But it leaves a lot of room for error and takes a lot of your time.

Payroll software automates most of the payroll processing steps. It calculates pay and deductions, handles remittances to the CRA, and generates T4s at year-end. A good payroll software or service can save you time and provide peace of mind that things are being done correctly.

Going the manual route may seem cheaper initially, but mistakes can lead to costly penalties from the CRA. Unless you are very confident in your understanding of the ever-changing contribution rate for CPP and EI premiums, using a dedicated service is often the safer choice for running payroll.

The Path to Seamless Small Business Payroll

Learning how to do payroll in Canada is a big milestone for any small business owner. It starts with getting the right government accounts and employee forms. From there, it becomes a cycle of calculating pay, making deductions, and paying both your employees and the CRA on time.

Staying organized and paying close attention to deadlines are the most important parts of the job. It requires a careful approach to payroll compliance to avoid issues with the Canada Revenue Agency. Using a reliable payroll service can make the entire payroll process much smoother.

The process might seem complicated at first, but by following these steps, you can build a system that works for your business. Managing payroll in Canada correctly builds trust with your team and keeps you in good standing with the government.