Payroll Setup Guide for Canadian Small Businesses

Hiring your first employee is a major milestone for any small business. But with that milestone comes a set of payroll obligations that the Canada Revenue Agency takes very seriously. This guide walks you through everything you need to know to set up and run payroll correctly in Canada.

Step 1: Open a CRA Payroll Account

Before making your first payment to an employee, you need a payroll program account with CRA. If you already have a Business Number (BN), you can add an RP (payroll) account to it. If you do not have a BN yet, you can register for one and add the payroll account at the same time through CRA's Business Registration Online portal.

Your payroll account number will look like: 123456789 RP 0001. The "RP" identifies it as a payroll account, and the four-digit suffix allows for multiple payroll accounts under the same BN if needed.

Step 2: Collect Employee Information

When you hire a new employee, you need to collect the following before their first paycheque:

Social Insurance Number (SIN): Required for all tax reporting purposes. You must verify the SIN within three days of the employee's start date.
TD1 Federal form: The Personal Tax Credits Return, which determines the amount of tax to withhold from the employee's pay. Every employee must complete one when hired.
TD1 Provincial form: The provincial equivalent of the TD1, which accounts for provincial tax credits. In Saskatchewan, this is the TD1SK.
Direct deposit information: Bank transit number, institution number, and account number (if you will pay by direct deposit).

Step 3: Understand Source Deductions

As an employer, you are required to withhold three types of source deductions from each employee's paycheque:

Canada Pension Plan (CPP)

CPP contributions are shared equally between the employer and employee. For 2025, the employee contribution rate is 5.95% on pensionable earnings between the basic exemption ($3,500) and the first earnings ceiling ($71,300). There is also CPP2, a second enhanced contribution of 4% on earnings between the first ceiling and the second ceiling ($81,200).

As an employer, you must match your employee's CPP contributions — meaning you pay the same amount as they do.

Employment Insurance (EI)

EI premiums are also shared, but not equally. For 2025, the employee rate is 1.64% on insurable earnings up to the maximum insurable earnings ($65,700). The employer pays 1.4 times the employee's premium — so for every $1.64 the employee contributes, you contribute $2.30 per $100 of insurable earnings.

Income Tax

You must withhold federal and provincial income tax based on the employee's earnings and the tax credits claimed on their TD1 forms. CRA provides online payroll deduction calculators and tables to determine the correct withholding amount for each pay period.

Step 4: Remit Source Deductions to CRA

Source deductions must be remitted to CRA on a regular schedule. Your remittance frequency depends on your average monthly withholdings:

Regular remitter: Deductions are due by the 15th of the month following the month in which you made the deductions
Quarterly remitter: New, small employers may qualify to remit quarterly (by the 15th of the month after the end of each quarter)
Accelerated remitter: Larger employers may need to remit twice monthly or even four times monthly

Important: CRA charges significant penalties for late or insufficient payroll remittances — up to 10% for repeat offenders. Additionally, directors of a corporation can be held personally liable for unremitted payroll source deductions. This is one of the few areas where corporate liability protection does not shield you.

Step 5: Prepare Year-End Payroll Documents

T4 Slips

By the last day of February each year, you must prepare and file T4 slips for every employee who received employment income during the previous calendar year. The T4 reports total employment income, CPP contributions, EI premiums, income tax deducted, and other required information. You must provide copies to both CRA and the employee.

T4 Summary

Along with the individual T4 slips, you must file a T4 Summary (T4 SUM) that totals the amounts from all T4 slips. This is filed with CRA by the same deadline.

Record of Employment (ROE)

You must issue a Record of Employment (ROE) to any employee who experiences an interruption of earnings — whether due to termination, layoff, leave, or any other reason. ROEs are filed electronically through Service Canada's ROE Web portal. For most situations, the ROE must be issued within five calendar days of the end of the pay period in which the interruption of earnings occurs.

Step 6: Register with Provincial Authorities

In addition to your CRA payroll obligations, Saskatchewan employers must also:

Workers' Compensation Board (WCB): Register with WCB Saskatchewan if you have workers. WCB provides coverage for workplace injuries and is mandatory for most industries. Premiums are based on your industry classification and payroll.
Saskatchewan Employment Standards: Comply with minimum wage, overtime, vacation pay, and other employment standards under The Saskatchewan Employment Act.

Payroll Software Options

Manual payroll calculation is possible but error-prone. Modern payroll software automates calculations, generates pay stubs, files remittances, and prepares year-end documents. Popular options for Canadian small businesses include:

Wagepoint: A Canadian payroll platform designed specifically for small businesses. Easy to use, handles all source deductions, direct deposits, and CRA remittances automatically.
QuickBooks Online Payroll: Integrates directly with QBO for seamless accounting and payroll in one system. Handles T4 preparation and CRA filing.
ADP Run: A scaled-down version of ADP for small businesses. Offers robust compliance features and reliable support.
Payworks: A Canadian-owned payroll provider offering cloud-based payroll, HR, and workforce management solutions.
Humi: An all-in-one Canadian HR and payroll platform popular with growing businesses.

Common Payroll Mistakes to Avoid

Misclassifying workers: Treating employees as independent contractors to avoid payroll obligations is a serious compliance risk. CRA actively audits for worker misclassification.
Late remittances: Penalties are steep and director liability is real. Set up automatic remittances through your payroll software.
Incorrect taxable benefit calculations: Items like personal use of a company vehicle, group insurance premiums, and employee discounts may be taxable benefits that must be included on the T4.
Not updating TD1 forms: Employees should submit new TD1 forms when their personal tax situation changes.
Forgetting about ROEs: Failing to issue an ROE on time can result in penalties and delays for your employee's EI claim.

Let Us Handle Your Payroll

Payroll is one of the most compliance-sensitive areas of running a business, and mistakes can be costly. At DLA CPA, we offer full-service payroll processing that handles everything from setup to year-end T4 filing. We ensure your deductions are correct, your remittances are on time, and your year-end documents are filed accurately.