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.