How Does Payroll Work for a Small Business in Canada?
Updated: Sep 23
Short answer: To run payroll in Canada, you open a CRA payroll (RP) account, deduct CPP, EI and income tax from each employee's pay, add the employer's share of CPP and EI, remit the total to the CRA by your due date, and file T4 slips by the last day of February. A late remittance is penalized from the first day.
Payroll is the process of paying your employees and sending the government its share of every pay. It is the area where small errors become expensive fastest, because the money you are holding is not yours - it belongs to the employee and the CRA. This guide uses the 2026 figures, with Ontario rules where the province sets them.
How do I set up payroll, step by step?
Small business payroll in Canada follows the same six steps for every employer, from a one-person corporation to a crew of twenty. The CRA lays them out in this order:
Confirm the worker is an employee. Payroll deductions apply to employees, not contractors (see the employee-or-contractor section below).
Open a payroll account. Add an RP program account to your CRA business number before the first pay. You can do this online through Business Registration Online or your CRA business account.
Collect employee information. Get each employee's Social Insurance Number and a completed federal and provincial TD1 form. The TD1 sets how much income tax you withhold.
Calculate deductions on every pay. CPP, EI and income tax come off the gross pay; you add the employer's share of CPP and EI on top.
Remit to the CRA on time. Your remitter type (below) sets the due date.
File T4 slips and the T4 Summary by the last day of February for the previous calendar year.
If you use QuickBooks Online Payroll or another payroll program, steps 4 to 6 are mostly automated - but you still have to check them.
What do I have to deduct from an employee's pay?
Three things come off an employee's gross pay: Canada Pension Plan contributions, Employment Insurance premiums, and federal and provincial income tax. You then add the employer's share on top of the deductions, and remit the whole amount together.
The 2026 figures:
Item | 2026 figure |
CPP maximum pensionable earnings | $74,600 |
CPP basic exemption | $3,500 |
CPP rate (employee and employer each) | 5.95% |
CPP maximum contribution, each side | $4,230.45 |
CPP2 earnings range | $74,600 to $85,000 |
CPP2 rate (each side) | 4% |
CPP2 maximum, each side | $416 |
EI maximum insurable earnings | $68,900 |
EI employee premium rate | 1.63% |
EI maximum employee premium | $1,123.07 |
EI employer premium | 1.4 times the employee amount ($1,572.30 maximum) |
So an employee earning $85,000 or more in 2026 contributes $4,230.45 in CPP, $416 in CPP2 and $1,123.07 in EI. The employer matches CPP and CPP2 exactly, and pays $1,572.30 in EI - about $6,218 in employer cost on top of the salary.
Income tax is calculated from the employee's TD1 forms and the CRA's payroll deduction tables, or automatically by your payroll software.
When do I have to remit to the CRA?
Most small employers remit monthly: everything withheld in March is due by April 15. Your exact due date depends on your remitter type.
Your remitter type is set by your average monthly withholding amount (AMWA) - the average of the total you remitted, per month, two calendar years ago. The CRA assigns it and tells you; it changes as you grow.
Remitter type | Threshold | Due date |
Quarterly (new small employer) | Monthly withholding under $1,000 | Apr 15, Jul 15, Oct 15, Jan 15 |
Quarterly (small employer) | AMWA under $3,000 | Apr 15, Jul 15, Oct 15, Jan 15 |
Regular (monthly) | AMWA under $25,000 | 15th day of the following month |
Accelerated - threshold 1 | AMWA $25,000 to $99,999.99 | 25th of the same month (for the 1st-15th) and the 10th of the next month (for the 16th-end) |
Accelerated - threshold 2 | AMWA $100,000 or more | 3rd working day after the 7th, 14th, 21st and last day of the month |
If a due date falls on a Saturday, Sunday or a public holiday recognized by the CRA, payment is on time if it is received or processed at a Canadian financial institution by the next business day.
What is a PD7A, and why should I check it?
The PD7A is the statement of account the CRA issues for your payroll remittances. It shows what the CRA has recorded as received and what it thinks you still owe, and it is where you report the gross payroll and number of employees for the period.
It is also the single best early-warning system in payroll. If your own records say you remitted $4,200 and the PD7A says $3,900, something went wrong - a payment applied to the wrong account or the wrong period, usually - and it is far easier to fix in month two than at year-end when the T4 Summary will not balance.
When are T4 slips due?
T4 slips and the T4 Summary are due by the last day of February following the calendar year they cover. That deadline is not tied to your fiscal year end - payroll always runs on the calendar year, even if your corporate year ends in June.
Late-filing penalties under the CRA's administrative policy start small and escalate:
The larger risk is not the penalty. It is that T4s which do not agree to what you actually remitted trigger a pensionable and insurable earnings review - a PIER report - that you then have to resolve.
Is my worker an employee or a contractor?
This decision is not yours to make by preference, and getting it wrong is the most expensive payroll mistake there is. If the CRA reassesses a contractor as an employee, the employer becomes liable for both sides of CPP and EI, plus interest and penalties, going back over the period.
The CRA weighs several factors together - no single one decides it:
Control: who decides when, where and how the work is done
Tools and equipment: who provides them, and who bears the cost
Subcontracting: whether the worker can hire someone else to do the work
Financial risk: whether the worker can lose money on a job
Investment and management: whether the worker has money invested in their own business and makes its business decisions
Opportunity for profit: whether the worker can increase profit by managing the work efficiently
A person who works only for you, on your schedule, with your equipment, is an employee no matter what the contract says.
What else does an Ontario employer owe?
Beyond the federal deductions, an Ontario employer also has provincial obligations:
WSIB premiums, if your industry is covered - most are
Employer Health Tax, which applies to Ontario payrolls above an exemption threshold ($1 million for eligible private-sector employers)
Vacation pay under the Employment Standards Act: 4% of wages for employees with less than five years of service, 6% at five years and over
Public holiday pay for Ontario's nine public holidays, calculated as regular wages plus vacation pay payable in the four work weeks before the holiday week, divided by 20
Public holiday pay is the calculation most often done wrong, because the divisor is always 20 - regardless of how many days the employee actually worked.
Frequently asked questions
Do I need a payroll account to pay myself as the owner?
If you pay yourself a salary, yes - an owner on payroll is an employee for source deduction purposes. If you take dividends instead, no payroll account is needed for that, but you have T5 filing obligations instead. Which is better depends on your situation and is worth a conversation with your accountant.
What happens if I remit late?
The CRA charges a penalty on the amount remitted late: 3% if it is 1 to 3 days late, 5% if 4 or 5 days, 7% if 6 or 7 days, and 10% if it is more than 7 days late or nothing is remitted. A second or subsequent assessment in the same calendar year, made knowingly or through gross negligence, is 20%. Interest runs on top.
Can I do payroll in QuickBooks Online?
Yes. QuickBooks Online Payroll calculates deductions, produces pay stubs, and generates T4s. The software does the arithmetic; someone still has to confirm the remitter type, the remittance is actually paid, and the year-end slips reconcile. Our payroll service does exactly that for clients.
How long do I keep payroll records?
Six years from the end of the tax year they relate to.
Sources
Canada Revenue Agency - CPP contribution rates, maximums and exemptions
Canada Revenue Agency - When to remit (pay) and remitter types
Canada Revenue Agency - When to file information returns (T4 deadline and penalties)
Canada Revenue Agency - Employee or self-employed: factors (contract outside Quebec)
Government of Ontario - Your guide to the Employment Standards Act: vacation
Government of Ontario - Your guide to the Employment Standards Act: public holidays
About Remote Bookkeeping
Remote Bookkeeping is a Canadian-owned firm providing monthly bookkeeping, financial reporting, payroll, HST/GST filing, year-end preparation and QuickBooks Online setup to small businesses across Canada. Founded by Lia and George, the firm has been keeping books for Canadian business owners for over 30 years. See our pricing, read when a Canadian small business has to register for GST/HST, or contact us - call (289) 867-0808 or 1-800-880-9141.
This article is general information for Canadian small business owners. It is not tax, legal or accounting advice for your particular situation. Rates and thresholds change - always confirm against the source linked above or ask us.
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