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Payroll

How to process payroll in Canada | A guide for employers


Key Takeaways

  • Payroll processing involves compliance with CRA regulations and provincial labour laws.

  • Using payroll tools simplifies the payroll process and ensures accuracy.

  • It's important to maintain payroll records for six years to meet CRA requirements.


  • Payroll processing is an essential part of running a business, but for solopreneurs and mid-size businesses, navigating the details can be daunting. From calculating deductions to ensuring compliance with federal and provincial laws, understanding how to process payroll correctly is critical.

    In this guide, we’ll simplify the steps, provide actionable tips, and highlight tools that can help you save time while staying compliant.

    What is payroll processing?

    Payroll processing is how businesses manage employee compensation, tax deductions, and benefits while adhering to labour standards and other regulations. This process involves adhering to regulations set by the Canada Revenue Agency (CRA) and provincial labour laws.

    Accurate payroll processing is critical to maintaining employee satisfaction and avoiding penalties. For any business, understanding and implementing an efficient payroll system is a vital part of day-to-day operations.

    Why payroll processing is important

    Whether you operate a small business or a mid-size company, effective payroll management:

    • Ensures compliance: Avoids fines and legal issues by meeting CRA and provincial standards.
    • Improves employee trust: Timely, accurate paycheques build trust and morale.
    • Streamlines business operations: Automating payroll frees up time for strategic activities like growth planning.

    Let's look at the steps required to process your payroll.

    A person sitting at a desk with a laptop computer.
    It's so smooth

    “My employees have the QuickBooks Workforce app on their phone. When they get to work they click ‘time in’ and then I can export, approve, and run payroll. It’s so smooth.”

    Tori Yeomans- Owner of Pride Beauty Lounge.

    Step-by-step guide to process payroll

    Processing payroll isn’t just about compensating your employees. It’s part of operating your business legally according to provincial laws and the Federal Labour Standards. These standards and laws have several requirements that fit into your payroll process—from tracking employee time at work to record keeping. You’ll want to keep these regulations in mind when establishing your payroll process.

    1. Register your business for payroll

    Before you can process payroll, your business must register for a payroll program account with the CRA. This account is essential for remitting payroll deductions, such as Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax. Businesses that employ staff—whether full-time, part-time, or on contract—are required to register. This includes small businesses, non-profits, and corporations. Even if you only have one employee, you must register.

    To set up your payroll program account, you’ll need your business number (BN) and details about your employees and pay periods. Registration can be completed online through the CRA’s Business Account portal, by mail, or by phone. Once registered, you’ll receive a payroll account number, which you’ll use to file and remit deductions to the CRA. For Quebec-based businesses, registration with Revenu Québec may also be necessary for deductions specific to the province, such as the Québec Pension Plan (QPP).

    2. Choose a payroll system

    Your first decision is selecting a payroll system that aligns with your business's size and needs.

    • Manual processing: While cost-effective, it can be labour-intensive and prone to human error.
    • Outsourcing: Payroll service providers handle complex tasks, but outsourcing can be expensive.
    • Payroll tools: Solutions like QuickBooks Payroll automate calculations, compliance updates, and direct deposits. With CRA regulations frequently changing, automated payroll tools reduce the risk of errors and ensure compliance with the latest rules.

    When deciding on the right payroll system for you, consider things like future growth of your business, employee benefits, and the complexity of your province's payroll laws. The more complicated, the more likely it is you'll want to outsource your payroll or purchase a payroll tool to help simplify the process.

    3. Create a payroll policy

    A clear payroll policy establishes consistency and fairness for all employees. Key components include:

    • Pay schedules: Weekly, biweekly, or monthly are the most common.
    • Deductions: How taxes, benefits, and pension contributions will be handled.
    • Vacation and statutory holiday pay: Ensure your policy adheres to provincial and federal requirements.
    • Pay dates: When will employees get their paycheques?
    • Type of pay: You'll need to decide between direct deposit or cheques.

    For example, in British Columbia, employees are entitled to 4% vacation pay if they’ve worked less than five years and 6% after five years. Before you create a payroll policy, review your local labour laws, provincial overtime laws, and federal labour standards.

    The most common violation is unpaid overtime, which can happen by accident when you don’t know the rules.

    4. Gather employee information

    Ensure you collect all necessary information before processing payroll. If you have employees, you should also have all the personal information that is required for payroll. This includes their social insurance number (SIN), and completed Form TD1 - Personal Tax Credits Return.

    • Required forms:
    • Form TD1 (both federal and provincial)
    • Social Insurance Number (SIN)
    • Additional details:
    • Banking information for direct deposit
    • Benefit selections (e.g., health insurance, retirement savings plans)

    You'll also want to make sure you have an employment contract that states the employee's job description, rate of pay, work schedule, benefits, and any additional terms or conditions of their employment. The contract should clearly outline expectations, such as performance standards and company policies, to avoid misunderstandings down the line.

    5. Set up direct deposit

    Most employees prefer direct deposit for its convenience and reliability. Direct deposit can come with a nominal fee, but it’s convenient for both employees and their employers, and it can be included in the cost of payroll software. As a business owner, you can set up direct deposit through your business bank directly or your payroll service provider.

    If your employees have opted for direct deposit, they’ll have to provide you with their bank’s name, their account number, their account type (chequing or savings), and their bank’s routing number. Once you have all that, the next step is to transfer that information to your payroll software or bank.

    Direct deposit offers several benefits, including faster processing times, reduced paper, and secure transactions.

    6. Implement a time-tracking system

    Accurate time tracking ensures fair pay for hourly employees and simplifies overtime calculations.

    Options include:

    • Digital systems: Apps and software that track hours automatically.
    • Manual tracking: Less expensive but prone to errors.

    If you opt for a digital tracking system, choose one that integrates with your payroll tools to avoid duplicating work.

    7. Collect and review timesheets

    Whether you opt for digital or manual time-tracking, you'll want to review employee timesheets carefully to ensure they’re accurate before processing payroll.

    • What to check for:
    • Overtime hours
    • Statutory holiday pay
    • Paid leave or sick days

    Example: In Ontario, overtime pay kicks in after 44 hours of work per week, and any additional hours must be compensated at 1.5 times the regular hourly rate.

    8. Approve and submit payroll

    Approval is the most important step when running payroll for hourly employees. This is your chance to make sure all the hours worked make sense, so payroll is accurate. Once you have approved all employee time cards, you’re ready to run payroll and issue payments to employees.

    • Payroll approval checklist:
    • Verify employee hours and salaries
    • Confirm tax deductions and benefits contributions
    • Double-check direct deposit details

    9. Report and maintain records

    Payroll reporting and record-keeping are crucial for CRA compliance.

    Key payroll reports include:

    • T4 slips for employees: Annual tax forms issued to employees that summarize their income and deductions, such as CPP, EI, and income tax, for the year.
    • Records of Employment (ROEs): Documents issued when an employee experiences an interruption in earnings, used to determine eligibility for EI benefits.
    • Payroll transaction summaries: Detailed reports that track payroll-related payments, including wages, deductions, and company contributions, for a specific period.

    note iconPro Tip: The CRA requires payroll records to be kept for six years. Consider using digital storage for better organization and access.


    Mandatory payroll deductions for 2025

    Employers are required to withhold specific amounts from employees' paycheques to comply with federal and provincial regulations.

    These mandatory payroll deductions include:

    • Income Tax: Based on the employee's taxable income and applicable federal and provincial tax rates.
    • Canada Pension Plan (CPP) Contributions: A retirement benefit program funded by contributions from both employees and employers.
    • Employment Insurance (EI) Premiums: Provides temporary financial assistance to unemployed individuals.

    For 2025, the CPP contribution rates and maximums are as follows:

    • Employee contribution rate: 5.95% of pensionable earnings.
    • Company contribution rate: 5.95% of pensionable earnings.
    • Maximum pensionable earnings: $71,300.
    • Basic exemption amount: $3,500.
    • Maximum annual employee contribution: $4,034.10
    • Maximum annual company contribution: $4,034.10

    Note: The basic exemption amount is the portion of earnings not subject to CPP contributions.

    The EI premium rates and maximums for 2025 are:

    • Employee premium rate: 1.64% of insurable earnings.
    • Employer premium rate: 2.296% of insurable earnings (1.4 times the employee rate).
    • Maximum insurable earnings: $65,700.
    • Maximum annual employee premium: $1,077.48.
    • Maximum annual employer premium: $1,508.47.

    note icon
    Note: Employers in Quebec have different EI rates due to the Quebec Parental Insurance Plan (QPIP).


    Income tax deductions vary based on the employee's total income, tax credits, and the federal and provincial tax rates. Employers to stay updated on these rates, as they are subject to annual adjustments.

    Accurate withholding ensures compliance with the CRA and helps employees meet their tax obligations.

    Payroll compliance tips for 2025

    Staying compliant with payroll regulations is essential for avoiding penalties and ensuring smooth operations. Payroll compliance means adhering to federal and provincial labour standards, accurately calculating and remitting deductions, and keeping up with annual changes in tax laws.

    While it may seem complex, following these best practices can help you navigate compliance requirements with confidence and keep your business running efficiently.

    1. Stay updated: Labour standards and tax rates can change yearly. Subscribe to CRA updates to stay informed.
    2. Remit deductions on time: Submit CPP, EI, and tax deductions by the deadlines to avoid penalties.
    3. Understand provincial rules: For example, Quebec has unique payroll requirements, including mandatory participation in the Quebec Pension Plan (QPP).

    Common payroll challenges and solutions

    Processing payroll can be a complex task, especially for small and mid-size businesses juggling multiple responsibilities. From managing deductions to staying compliant with ever-changing regulations, there’s no shortage of potential pitfalls.

    However, understanding these common challenges and employing the right solutions can help you streamline your payroll process and avoid costly mistakes. Here’s a closer look at some frequent issues and how to tackle them effectively.

    Challenge: Incorrect classification of employees vs. contractors

    Solution: Review CRA guidelines to avoid misclassification, which can lead to penalties.

    Challenge: Manual payroll errors

    Solution: Automate calculations using tools like QuickBooks Payroll to minimize human error.

    Challenge: Managing payroll taxes

    Solution: Use the CRA’s online payroll deductions calculator or payroll software with built-in compliance features.

    How payroll tools simplify the process

    Managing payroll manually can be time-consuming and prone to errors, but payroll tools can offer a modern solution that saves time, ensures accuracy, and keeps you compliant with Canadian regulations. These tools simplify every step of payroll processing, from calculating deductions to generating reports.

    Whether you’re a solopreneur or managing a growing team, payroll software can transform payroll into a seamless and stress-free process.

    Payroll tools, like QuickBooks Payroll, offer:

    • Automation of tax calculations: Ensures accurate deductions based on current CRA rates.
    • Direct deposit integration: Speeds up payment processing.
    • Compliance updates: Keeps you informed of changes to tax laws and labour standards.

    note iconBonus: Many payroll solutions also provide access to detailed reports, helping you analyze labour costs and plan for the future.


    Managing payroll may seem complex, but with the right tools and a clear process, it becomes manageable. Tools like QuickBooks Payroll can simplify every step, from calculations to compliance. Start streamlining your payroll process today.

    Frequently asked questions

    Disclaimer

    Money movement services are provided by Intuit Canada Payments Inc.

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    Michelle Cornish
    Michelle Cornish is a freelance writer specializing in demystifying the complexities of accounting and tax for businesses and individuals

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