No business can grow with just one person managing the show. There comes a point where you have to scout new talent and hire people smarter than you. Hiring your first employee might seem like it will ease the work pressure, but it increases it. All the paperwork and income tax calculations, while ensuring you have enough cash to pay salary on time, even when your invoices are delayed, suddenly catches you off guard.        

Payroll has two sides: Most business owners focus on the operations side, which includes salary negotiations and payments. But there is another side of Compliance that includes documentation, recordkeeping, and communication with the Canada Revenue Agency (CRA) on various fronts. What exactly are the compliance requirements, and how do you go about fulfilling them properly? Let’s find out.

Where to Begin?

Even before you pay the first salary, there are certain things you need to take care of, beginning with:

1. Registration: As a small business, you need to register with the CRA for a payroll program account, which allows you to remit payroll deductions like income tax, Employment Insurance (EI), and Canada Pension Plan (CPP) to the government. On registration, you will receive a 15-character payroll program account number from the CRA, which will be required for all your payroll filings and remittances.

2. Payroll Frequency: Next, choose payroll frequency: weekly (with 52 pay periods per year), biweekly or every two weeks (26 pay periods per year), semi-monthly (24 pay periods per year), or monthly (12 pay periods per year). This frequency depends on the nature of your business, your billing and payment cycles, and cash flow needs. For instance, labour-intensive businesses such as restaurants or retail shops usually opt for weekly payrolls, while consulting agencies or professional services might opt for monthly payrolls.

3. Onboarding: Next, collect a completed TD1 form when onboarding employees. This form will determine your tax withholding amounts.

CRA’s Payroll Obligations

With the above preliminaries taken care of, you must fulfill CRA’s three obligations of withholding, remitting, and reporting.

I. Withholding: In Canada, the employer is responsible for:

• Deducting premiums under the Employment Insurance (EI) program, which provides temporary income to out-of-work employees or employees who are on leave for reasons such as illness or parental leave,
• Withholding federal, provincial, and territorial income taxes from your employees’ salaries and paying them only the after-tax amount, and
• Deducting the Canada Pension Plan (CPP) contributions for the retirement benefit system, which provides a fixed income to retired or disabled Canadian employees.

Based on the employee’s earnings, the correct income tax, CPP, and EI contributions are automatically calculated and applied by the CRA’s payroll program, helping you avoid any errors in calculations and consequent penalties or fines.

II. Remitting: Businesses must remit the deductions withheld above to the CRA in a timely and compliant manner. While deciding on payment frequency, consider the above withholdings as they are remitted to the CRA for each pay period. Always remit before the deadline to avoid penalties. A 1–3-day late remittance attracts a 3% penalty, a 4–5-day delay attracts a 5% penalty, and those over a week incur a whopping 10% penalty. Moreover, interest at 7% (as of the first quarter of 2026)is charged on such overdue taxes, increasing your financial burden.

III. Reporting: By February 28, the employer must issue a T4 slip (Statement of Remuneration Paid) to the employee and file T4 slips and a T4 Summary with the CRA for every employee they paid a salary. The T4 slip includes details of the employee’s salary and deductions for the year, such as income taxes, CPP, and EI.  

Other Payroll Considerations

Apart from the mandatory deductions, business owners may offer other benefits, such as health or dental insurance or vacation pay, to attract and retain talent. Vacation pay varies by province and depends on the duration of the employee’s service.  

Classifying the Right Type of Employment

If the above-mentioned benefits seem overwhelming, a small business owner can choose different types of employment arrangements that don’t require all of them.

• Full-Time Employees (who work regularly for 30-40 hours per week), part-time employees (who work regularly but usually for less than 30 hours a week), and seasonal employees (who work only during certain times of the year) are entitled to all benefits. Thus, you have to take into consideration all deductions, including CPP, EI, and vacation pay, for them.
• Contract Workers or Independent Contractors are not considered employees, but rather professionals who provide specific services to your business. They are not entitled to regular employee benefits or tax deductions and are paid as per the terms agreed upon in the contract.

Compliance is just one part of payroll. All the above benefits depend on variables like the employee’s income, duration of service, leaves and days worked, and nature of employment, making benefits calculation a nightmare prone to serious errors. Businesses can use payroll-specific software to calculate and manage deductions and pay.

Setting Up Payroll Software

While payroll-specific software makes tough calculations easier, setting up a payroll system is tedious, involving the following steps:

1. Add company details like business name, official mailing address, business phone number, and official email address, so that you can receive any important information or notifications from the CRA.
2. Create pay groups for different payroll frequencies to make it easier to calculate deductions and disperse salaries.
3. Set up mandatory deductions on the payroll system by adding your CRA payroll account number, remittance schedule, and the applicable tax fields.  
4. Add business banking information, including bank name, account number, and transit number, for direct deposits into your official business account. You are also required to submit a void cheque or direct deposit form for verification.
5. Add employee details, including their name, current address (to be used for tax reporting and T4 filing at the end of the year), Social Insurance Number (SIN), and bank account details (to deposit their salaries). Submit Federal and Provincial TD1 Forms filled by employees to understand their tax obligations and benefits. Ensure that employees update their forms to incorporate life changes (marriage or dependents), which could alter their tax rates and benefits.
6. Add employment details of each employee, such as hours worked, their monthly salaries or weekly wages, and any bonuses or overtime pay, if applicable.
7. Based on the information you have entered, the software will calculate all necessary income tax deductions, disburse employees’ net salaries directly into their bank accounts, and make the necessary remittance to the CRA. At the same time, it will create a detailed payroll report for your own business recordkeeping.

Mistakes in calculating deductions or missing out on remittance deadlines can cause trouble with the CRA and lead to heavy penalties. Having a qualified accountant on your side for this payroll setup process can help with the compliance angle of the payroll process while you focus on operations.

Contact Glenn Graydon Wright LLP in Oakville to Help You with Payroll  

Talk to a professional accountant to help you understand payroll requirements, design an efficient system, automate it, and regularly review the disbursements and remittances for compliance with the latest requirements. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and bookkeeping services, call today at 905-845-6633 or connect with us online to schedule an initial consultation.