Step 1: Open a payroll account and register with your province
Before your first pay date, add a payroll program account (it ends in RP0001) to your CRA business number. You can do this online through My Business Account or through your provincial business registry. If you operate in Québec, you also register with Revenu Québec, which administers Québec income tax, QPP and QPIP deductions separately from the CRA.
Register with your provincial workers’ compensation board as well (WorkSafeBC, WSIB in Ontario, WCB in most other provinces, CNESST in Québec). Depending on your province and payroll size, you may also owe an employer health tax or levy, such as Ontario’s Employer Health Tax or the health and post-secondary education levies in Manitoba and Newfoundland and Labrador. Find out early which ones apply to you.
Step 2: Collect employee information
For each new employee, collect their legal name, address, date of birth and social insurance number (you must ask for it within three days of their start date). Have them complete a federal TD1 and a provincial TD1 for their province of employment, or Québec’s TP-1015.3. The TD1 claim amounts change how much income tax you withhold.
Record their pay rate, pay type (hourly or salaried), start date, vacation entitlement and any benefits or deductions such as group insurance, RRSP contributions or union dues. If you pay by direct deposit, collect a void cheque or direct deposit form. Keep all of this securely; payroll records must be retained for six years.
- Social insurance number
- Federal and provincial TD1 (or TP-1015.3 in Québec)
- Pay rate, pay type and pay frequency
- Vacation entitlement and benefits
- Banking details for direct deposit
- Province of employment
Step 3: Pick a pay frequency and calculate gross pay
Common pay frequencies are weekly (52 pays a year), bi-weekly (26), semi-monthly (24) and monthly (12). Check your province’s employment standards; most require employees to be paid at least semi-monthly or on a regular schedule.
Gross pay is regular wages plus everything else earned in the period: overtime, vacation pay (if paid out each cheque), statutory holiday pay, commissions, bonuses and taxable benefits. Overtime rules differ by province. Ontario pays overtime after 44 hours in a week; Alberta uses the greater of daily (over 8 hours) or weekly (over 44 hours) overtime; British Columbia has daily overtime with two tiers plus a weekly threshold of 40 hours. Statutory holiday pay also uses a different formula in each province, which our guide on stat holiday pay by province covers in detail.
Step 4: Calculate source deductions
From gross pay you withhold three main amounts. Canada Pension Plan contributions (or Québec Pension Plan in Québec), including the second additional contribution (CPP2) on earnings between the first and second earnings ceilings. Employment Insurance premiums, at a reduced rate in Québec because Québec workers pay QPIP premiums instead. And federal and provincial income tax, calculated using the CRA’s payroll formulas (published as T4127) or its Payroll Deductions Online Calculator.
Contribution rates, maximum pensionable earnings and maximum insurable earnings change every January, so make sure your tables or software are updated for the current year. Once an employee hits the annual maximum for CPP or EI, you stop deducting for the rest of the year (and start again in January). Taxable benefits, such as a company vehicle or employer-paid group life insurance, add to the amounts subject to deductions even though no cash changes hands.
Then take any voluntary or court-ordered deductions: benefits premiums, RRSP contributions, union dues and garnishments. Garnishments have their own priority rules, so follow the order on the court or government document.
Step 5: Add the employer’s share
Payroll costs more than gross pay. You match the employee’s CPP (or QPP) contribution dollar for dollar and pay 1.4 times the employee’s EI premium. You also pay workers’ compensation premiums and, where it applies, provincial employer health tax or levies. Québec employers have additional contributions, including the Health Services Fund and CNESST.
Budget for these from the start. When you price a role, add the employer contributions and vacation pay to the wage to get the true cost of the hire.
Step 6: Pay employees and issue pay stubs
Pay net pay by cheque, direct deposit or e-transfer on the scheduled pay date, and give each employee a pay statement. Provincial rules set what it must show, which usually includes the pay period, hours, rate, gross pay, each deduction, net pay and year-to-date totals.
If you use direct deposit, payroll software usually produces a bank file you upload to your business bank. SeroPayroll, for example, creates CPA 005 direct deposit files for the major Canadian banks (RBC, TD, Scotiabank, BMO, CIBC and Desjardins); you upload the file to your bank, and the bank moves the money. It also produces pay stubs with year-to-date amounts and a masked SIN, by PDF or email.
Step 7: Remit deductions to the CRA on time
The CPP, EI and income tax you withheld, plus your employer share, must be sent to the CRA by the due date for your remitter type. Most new employers are regular remitters, due on the 15th of the month after the month you paid employees. Very small employers with a perfect compliance record may qualify for quarterly remitting. Larger employers are accelerated remitters and pay twice or up to four times a month, depending on their average monthly withholding.
Late remittances carry penalties and interest, and the CRA treats withheld amounts as held in trust, so this is not a bill to pay late. Use the PD7A remittance voucher or pay electronically through your bank. In Québec, provincial deductions go to Revenu Québec on its own schedule.
Step 8: Keep records and prepare for year-end
After every pay run, post the payroll to your books: wages expense, employer contributions, and liabilities for amounts owed to the CRA and employees. Reconcile the payroll liability account to your remittances each month so year-end has no surprises.
At year-end you will issue T4 slips (and RL-1 slips in Québec) by the end of February, and an ROE each time an employee has an interruption of earnings. Our T4 year-end guide and ROE guide cover both. If you use SeroBooks Pro, payroll lives in the same ledger as the rest of your accounting; SeroPayroll does payroll on its own and exports journals for your accounting system.