How to Set Up Payroll for a Small Business in Canada
Hiring your first employee is a milestone — and a responsibility. Canadian payroll isn't just about paying people on time; it requires calculating source deductions accurately, registering with the CRA, remitting on schedule, and filing year-end slips. Done right, it's a manageable process. Done wrong, the penalties accumulate quickly. This step-by-step guide walks you through everything you need to do, in order, from your very first hire.
10 Steps to Setting Up Payroll in Canada
Register for a Payroll Program Account (RP Account)
Before issuing your first paycheque, you need to add a payroll program account to your Business Number (BN). Your BN ends in "RP" for payroll (e.g., 123456789 RP 0001). Register online through CRA My Business Account at canada.ca, or call the CRA Business Window at 1-800-959-5525. Registration is free and typically processed immediately online. Do this before your first pay date — there is no grace period.
Collect TD1 Forms from Each Employee
Every new employee must complete two TD1 forms: the federal TD1 and the provincial TD1 for the province where they perform most of their work. These forms tell you how much of the basic personal amount and other credits the employee is claiming, which determines how much federal and provincial income tax to withhold. Keep signed TD1s on file — the CRA may request them during an audit. Employees should update their TD1 whenever their personal situation changes (marriage, new dependant, disability, etc.).
Choose Your Pay Frequency
Decide how often you will pay employees: weekly (52 pay periods/year), bi-weekly (26), semi-monthly (24), or monthly (12). Each frequency has a different per-period CPP exemption and affects your employees' cash flow. Most small businesses choose bi-weekly or semi-monthly. Once chosen, remain consistent — changing pay frequency mid-year requires recalculating all source deductions and adjusting your remittance schedule.
Calculate Gross Pay for Each Pay Period
Gross pay is the total amount earned before any deductions. For hourly employees: hourly rate × hours worked. For salaried employees: annual salary ÷ number of pay periods per year. Include any taxable benefits (company car personal use, group insurance, etc.) in gross income — these are often overlooked but must be included for source deduction purposes.
Calculate Source Deductions
For each employee, calculate three deductions from gross pay:
- CPP (Canada Pension Plan): Apply 5.95% to pensionable earnings above the per-period basic exemption ($134.61 for bi-weekly pay, based on the $3,500 annual exemption). Stop once the employee reaches the annual maximum CPP contribution. You (the employer) match the employee's CPP contribution dollar for dollar — so your total CPP remittance is 2× the employee's deduction.
- EI (Employment Insurance): Apply 1.66% to insurable earnings. Stop once the employee reaches the annual maximum insurable earnings ($63,200 for 2026). Employer EI is 1.4× the employee amount (2.324% of insurable earnings). Your total EI remittance per employee = employee EI + employer EI.
- Income Tax: Use the CRA's free Payroll Deductions Online Calculator (PDOC) at canada.ca/pdoc, or the T4032 Payroll Deductions Tables for the applicable province. Enter gross pay, the pay period, and the TD1 claims — the calculator tells you exactly how much to withhold.
Use the PDOC calculator: The CRA's Payroll Deductions Online Calculator (PDOC) is free, always current with the latest rates, and handles every Canadian province and territory. It is the most reliable way to calculate source deductions — far less error-prone than doing the math manually.
Set Your Remittance Schedule
New employers start in the Regular remittance category — you remit monthly, with the payment due by the 15th of the following month. For example, payroll deductions withheld in January are due to the CRA by February 15. As your payroll grows, the CRA may move you to a more frequent remittance category (Threshold 1 or Threshold 2). For full details on categories and deadlines, see our guide on CRA payroll remittances.
Issue Paycheques or Set Up Direct Deposit
Net pay = Gross pay − Employee CPP − Employee EI − Income Tax withheld. Issue this amount to the employee by cheque or direct deposit. Provide a pay stub showing the gross pay, each deduction amount, and the net pay — this is required under provincial employment standards legislation in every province.
Remit Source Deductions to the CRA
By your remittance deadline (the 15th of the following month for Regular remitters), pay the total of: employee CPP + employer CPP + employee EI + employer EI + income tax withheld. Pay through CRA My Business Account, your bank's online bill payment ("CRA Payroll" or "Receiver General"), or at a Canada Post outlet. Always use your RP payroll account number as the reference — not your RC income tax account.
Keep Payroll Records
The CRA requires payroll records to be retained for a minimum of 6 years from the end of the tax year they relate to. Your records must include: payroll journal/register (employee name, pay periods, gross pay, each deduction, net pay), TD1 forms, time records for hourly employees, and copies of all T4 slips issued. Digital records are fully accepted by the CRA provided they are legible and accessible.
Year-End: T4 Slips and T4 Summary
By the last day of February each year, you must: (a) prepare a T4 slip for every employee who received employment income during the year, (b) file all T4 slips with the CRA along with a T4 Summary, and (c) give each employee their copy of the T4 slip. If any employees left during the year, issue a Record of Employment (ROE) within 5 calendar days of their last day. Review our article on T4A slips for contractors if you also engaged unincorporated self-employed workers during the year.
Useful CRA Resources for Payroll
- Payroll Deductions Online Calculator (PDOC): Free, always current, handles all provinces — canada.ca/pdoc
- T4032 Payroll Deductions Tables: Printed reference tables by province, updated annually
- RC4120 — Employers' Guide: Filing the T4 Slip and Summary: The complete CRA guide to T4 obligations
- CRA My Business Account: Register, remit, view account balances, and access all payroll forms online
Managing payroll yourself is manageable for one or two employees. As your team grows, the complexity increases — more employees, more provinces, more calculation variations. Our payroll management service handles all of the above on your behalf, from first-hire setup through monthly remittances and year-end T4 filing.
Ready to Hire? Let Us Set Up Your Payroll.
MaxRefund Business sets up and manages payroll for Canadian small businesses — from registration to monthly remittances to year-end T4s. Focus on growing your team; we'll handle the compliance.
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