Understanding online payroll for small business

Published Wednesday 27 May 2026

Table of contents

• What is payroll?
• How to set up payroll in Canada
• Canadian payroll deductions and contributions
• Payroll compliance in Canada
• How to choose payroll software
• How to run payroll: a 6-step checklist
• Understanding different types of employee pay
• Common payroll mistakes to avoid
• Simplify your payroll with Xero
• FAQs on online payroll

Key takeaways

• Canadian payroll means calculating and remitting CPP contributions, EI premiums, and income tax to the CRA each pay period.
• You must register for a CRA payroll account and collect employee tax forms before your first payday.
• Payroll software automates deduction calculations and year-end reporting, reducing the risk of costly compliance errors.
• Canadian employers must keep payroll records for six years and file T4 slips annually.

What is payroll?

Payroll is the process of paying your employees accurately and on time. In Canada, it also means calculating and remitting the right deductions to the CRA.

Every pay period, you withhold CPP contributions, EI premiums, and income tax from each employee's pay. Both federal and provincial income tax apply. You then remit those amounts, along with the employer's share, to the CRA by set deadlines.

Payroll also covers issuing pay stubs, tracking hours worked, managing vacation pay, and filing year-end tax documents. Getting it right keeps your business compliant and your employees paid fairly. For a deeper look at running payroll as a Canadian employer, see the small business payroll guide.

How to set up payroll in Canada

Before you can pay your first employee, you need to complete a few registration steps with the CRA. Setting up payroll correctly from the start helps you avoid penalties and delays down the road.

1. Register your business number and CRA payroll account

If you don't already have a Business Number (BN), apply for one through the CRA. You then need to register for a CRA payroll account, which is linked to your BN. This account is where you report and remit payroll deductions.

2. Collect employee information

Ask each new employee for their Social Insurance Number (SIN) and completed Personal Tax Credits Return (TD1) forms. The federal TD1 tells you how much tax to withhold. Provincial TD1 forms may also be required depending on where the employee works.

3. Choose a pay frequency

Decide how often you'll pay your employees. Common pay frequencies in Canada include weekly, biweekly, semi-monthly, and monthly. Your choice affects remittance schedules and cash flow planning.

4. Register for workers' compensation

Most Canadian provinces require employers to register with their provincial workers' compensation board. Requirements and deadlines vary by province, so check with your local board as soon as you hire your first employee.

Canadian payroll deductions and contributions

Understanding which deductions to withhold and remit is one of the most important parts of Canadian payroll. Both you and your employees share responsibility for certain contributions.

Canada Pension Plan (CPP) contributions

Employees and employers each contribute to CPP based on the employee's pensionable earnings. The CRA sets annual maximum contribution rates and earnings thresholds. Since January 2024, a second additional CPP contribution (CPP2) also applies. CPP2 covers earnings above the first ceiling, up to a second ceiling.

Employment Insurance (EI) premiums

Employees pay EI premiums on insurable earnings up to an annual maximum. As the employer, you pay 1.4 times the employee's premium. The CRA publishes updated EI rates and maximums each year.

Federal and provincial income tax

You must withhold federal income tax based on the employee's TD1 claim and pay level. Provincial or territorial income tax is withheld on top of that. Rates vary by province. The CRA's online payroll deductions calculator helps you determine the correct amounts.

Employer vs employee portions

Employees pay CPP contributions, EI premiums, and income tax through payroll withholdings. As the employer, you match CPP contributions dollar for dollar and pay 1.4 times the employee's EI premium. You remit both the employee and employer portions to the CRA together.

Remittance deadlines

Remittance deadlines depend on your remitter type, which the CRA assigns based on your average monthly withholdings. New employers typically remit by the 15th of the month following the pay period. Missing deadlines can result in penalties and interest charges.

Payroll compliance in Canada

Staying compliant with Canadian payroll rules protects your business from penalties and keeps your employees' records accurate. The CRA enforces strict reporting requirements throughout the year.

CRA reporting and T4 slips

By the last day of February each year, you must file T4 information returns with the CRA. You also need to provide T4 slips to each employee. These show total earnings and deductions for the previous calendar year.

Records of Employment

When an employee stops working, issue a Record of Employment (ROE). You must do this within five calendar days of their last day. Service Canada uses the ROE to determine the employee's eligibility for EI benefits. Late or incorrect ROEs can delay your employee's claim.

Penalties for non-compliance

The CRA charges penalties for late remittances. Rates start at three percent for amounts up to three days late. Amounts over seven days late incur a 10 percent penalty. Repeated failures can result in even higher penalties.

A 2025 survey of 1,000 small business leaders found that 84% had been affected by payroll errors. Incorrect wage calculations (48%) and late or missing payments (38%) were the most common mistakes.

Record retention

Canadian employers must keep payroll records for at least six years. The retention period runs from the end of the relevant tax year. This includes pay stubs, T4 slips, remittance records, and any supporting documents. The CRA can audit your payroll records at any time during that period.

How to choose payroll software

The right payroll software saves you time and reduces the risk of costly errors. With so many options available, it helps to know what features matter most for a Canadian small business.

A National Federation of Independent Business survey found 88% of small businesses find payroll tax laws too complex to manage alone. The same survey found 90% consult external tax professionals. Payroll software can handle much of that complexity for you.

Here are the key features to look for when choosing payroll software:

• Automatic deduction calculations. The software should calculate CPP, EI, and income tax withholdings based on current CRA rates.
• CRA remittance support. Look for built-in remittance tracking and deadline reminders to avoid late penalties.
• Year-end reporting. The software should generate T4 slips and other required filings without manual data entry.
• Direct deposit. Paying employees electronically is faster and more reliable than issuing paper cheques.
• Integration with accounting. Payroll data should flow into your accounting records automatically to keep your books accurate.

Research shows only half of organizations use cloud-based technology for payroll, and 85% report problems with their existing systems. Cloud-based payroll accounting software updates tax rates automatically and gives you access to your data from anywhere.

How to run payroll: a 6-step checklist

Running payroll follows the same basic steps each pay period. Here is a 6-step checklist to keep your process consistent and accurate.

1. Collect and verify hours

Gather timesheets or time-tracking records for all hourly employees. Confirm that hours, overtime, and any leave taken are recorded correctly before you calculate pay.

2. Calculate gross pay

For hourly employees, multiply hours worked by the hourly rate and add any overtime. For salaried employees, divide the annual salary by the number of pay periods. Include any bonuses, commissions, or vacation pay owed.

3. Calculate and withhold deductions

Deduct CPP contributions, EI premiums, and federal and provincial income tax from each employee's gross pay. Include any additional deductions such as union dues, group benefits, or registered retirement savings plan (RRSP) contributions.

4. Process net pay

Subtract total deductions from gross pay to get net pay. Transfer funds to employees through direct deposit or cheque. Provide each employee with a pay stub showing the breakdown.

5. Remit deductions to the CRA

Combine the employee withholdings with the employer's share of CPP and EI. Submit the total to the CRA by your assigned remittance due date. Track each remittance for your records.

6. Update your records

Record all payroll transactions in your accounting system. Keep copies of pay stubs, remittance confirmations, and any supporting documents. Accurate records make year-end filing and potential CRA audits much simpler.

Understanding different types of employee pay

Not every employee is paid the same way. Understanding the different types of compensation helps you set up payroll correctly and meet your obligations under Canadian employment standards.

• Salary. A fixed amount paid each pay period regardless of hours worked, common for full-time professional roles.
• Hourly wages. Pay based on the number of hours worked, with overtime rates applying when employees exceed provincial thresholds.
• Commissions. Earnings based on sales performance, often combined with a base salary or hourly wage.
• Bonuses. One-time or periodic payments on top of regular pay, such as performance bonuses or holiday bonuses.
• Vacation pay. A percentage of gross earnings (typically four percent in most provinces) paid when employees take vacation or on each paycheque.
• Statutory holiday pay. Pay for public holidays as required by provincial employment standards, calculated based on the employee's average daily earnings.

Each type of compensation has different rules for CPP, EI, and income tax withholdings. Check the CRA guidelines for how to treat each pay type when calculating deductions.

Common payroll mistakes to avoid

Even small payroll errors can lead to penalties, unhappy employees, and extra administrative work. Here are four common mistakes and how to avoid them.

• Misclassifying workers. Treating an employee as an independent contractor (or the reverse) affects deduction obligations and can trigger CRA penalties. Review the CRA's guidelines on worker classification before onboarding.
• Incorrect deduction calculations. Using outdated tax rates or missing CPP2 thresholds leads to under-remittance or over-remittance. Use current CRA tables or payroll software that updates rates automatically.
• Late remittances. Missing your CRA remittance deadline, even by a few days, triggers automatic penalties. Set calendar reminders or use software with built-in deadline alerts.
• Poor record-keeping. Incomplete or disorganized payroll records make year-end filing harder and increase your risk during a CRA audit. Keep all payroll documents for at least six years.

Simplify your payroll with Xero

Managing payroll takes time, attention to detail, and a solid understanding of Canadian tax rules. Xero Accounting Software handles repetitive payroll tasks like deduction calculations and record-keeping. That means less time on admin and more time running your business.

Payroll software reduces the risk of manual errors that lead to CRA penalties. It keeps your records organized, tracks remittance deadlines, and simplifies year-end reporting. To see how Xero can help your business, get one month free.

FAQs on online payroll

Here are answers to frequently asked questions about online payroll for Canadian small businesses.

What is the difference between payroll and salary?

Payroll is the entire process of calculating, distributing, and reporting employee pay and deductions. Salary is one type of employee compensation, referring to a fixed amount paid per pay period.

How often do you need to remit payroll deductions to the CRA?

Most new and small employers remit monthly, with payments due by the 15th of the month after the pay period. The CRA may assign a different frequency based on your average monthly withholding amount.

What happens if you make a payroll error in Canada?

You should correct the error as soon as possible and adjust the next pay run. If you under-remitted to the CRA, submit the difference promptly to minimize penalty and interest charges.

Can you do payroll yourself as a small business?

Yes, but it requires careful attention to CRA rules, deduction rates, and filing deadlines. Payroll software or a professional bookkeeper can reduce the risk of errors and save you significant time.

What payroll records do Canadian employers need to keep?

You must keep pay stubs, T4 slips, remittance confirmations, timesheets, and employee tax forms for at least six years. The CRA can request these documents during an audit at any time within that period.