How to Run Payroll in Canada: Step-by-Step Guide for Employers

Every Canadian employer eventually faces the same gut-check moment: payroll day arrives, and you realize you haven't calculated the correct CPP contributions, you're unsure about the remittance deadline, or you've used the wrong provincial tax table. One mistake can trigger CRA penalties, interest charges, and hours of corrective paperwork. If you're wondering how to run payroll in Canada without losing sleep, this guide walks you through every step - from registering for a payroll account to filing your T4 summary - with the exact CRA rules and dollar figures you need.

Step 1: Register for a CRA Payroll Account

Before you can pay anyone, you need a payroll program account with the Canada Revenue Agency. This is separate from your business number (BN) or GST/HST account. You register online through CRA's My Business Account portal or by calling the business enquiries line. You'll receive a 15-character account number ending in "RP" (for Remuneration Payable).

Why this matters: Without an active payroll account, you cannot remit source deductions, and any payments you make to employees will not be credited to their CRA records. If you hire even a single employee part-time, you must register. The penalty for failing to register can be 10% of the amount you should have remitted, plus interest.

Once registered, you'll also need to set up a payroll deduction remittance schedule. CRA assigns a remittance frequency based on your average monthly withholding amount (AMWA). For most small businesses with an AMWA under $3,000, you are a regular remitter and must remit monthly by the 15th of the following month. If your AMWA exceeds $3,000, you become an accelerated remitter (thresholds differ for threshold 1 and threshold 2). Check your CRA notice of assessment or My Business Account to confirm your status.

Step 2: Collect Employee Information and Determine Province of Employment

Every new employee must complete the federal and provincial TD1 forms - the personal tax credits return. These forms tell you the amount of basic personal amount and other tax credits the employee claims, which directly affects the income tax you withhold. For 2026, the federal basic personal amount is $15,705 (indexed annually). Each province also sets its own basic amount; for example, Ontario's is $12,399 for 2026.

You also need the employee's Social Insurance Number (SIN), date of birth, and address. Verify the SIN with Service Canada - a wrong SIN can lead to mismatched T4 slips and CRA reassessments for the employee. If the employee works in a different province than your business is located, use the tax tables for the province where the employee performs their duties. For example, if your head office is in Alberta but the employee works remotely from Quebec, you must deduct Quebec Pension Plan (QPP) and Quebec parental insurance plan (QPIP) instead of CPP and EI.

Real-world scenario: A 12-person contractor firm in Ontario hired a remote employee living in Quebec. They used Ontario tax tables for three months before realizing the error. The correction required filing amended PD7A statements, paying QPP arrears, and issuing revised T4s. The total penalty and interest exceeded $2,000.

Step 3: Calculate Gross Pay and Statutory Deductions

Gross pay is the total compensation before any deductions. For salaried employees, divide the annual salary by the number of pay periods. For hourly employees, multiply hours worked by the hourly rate, including overtime (1.5x after 44 hours per week in most provinces).

From gross pay, you must deduct the following:

• Canada Pension Plan (CPP) contributions: For 2026, the employee contribution rate is 5.95% on pensionable earnings between the basic exemption ($3,500) and the Year's Maximum Pensionable Earnings (YMPE) of $71,300. The employer matches this dollar-for-dollar. So the maximum employee contribution is $4,038.60 ($71,300 - $3,500) × 5.95%. The employer also contributes $4,038.60.
• Employment Insurance (EI) premiums: For 2026, the employee premium rate is 1.64% on insurable earnings up to the Maximum Insurable Earnings of $65,700. The maximum employee premium is $1,077.48. The employer pays 1.4 times the employee premium, so $1,508.47.
• Income tax: Withhold federal and provincial income tax based on the employee's TD1 claim codes and the CRA's payroll deduction tables (or use CRA's Payroll Deductions Online Calculator).

Other possible deductions include provincial parental insurance (Quebec only), union dues, and court-ordered garnishments. You must also deduct any amounts for group benefits (e.g., health insurance) if the employee has elected coverage.

If you do X vs Y: If you incorrectly use last year's CPP rates (e.g., 5.70% instead of 5.95%), you will under-remit. The CRA will charge interest at the prescribed rate (currently 9% for overdue amounts) plus a penalty of 10% of the shortfall if you miss the remittance deadline.

Step 4: Record Payroll and Issue Pay Stubs

After calculating deductions, you net pay - gross pay minus all deductions - and issue the payment to the employee. You must provide a pay stub (electronic or paper) that shows:

• Gross pay for the period and year-to-date
• All deductions (CPP, EI, income tax, other) for the period and year-to-date
• Net pay
• Employer contributions (CPP and EI) - these are not deducted from employee pay but must be shown on the pay stub or a separate statement

Maintain a payroll register that records every payment, deduction, and remittance. This register is your source document for T4s and year-end reporting. Many employers use payroll software to automate calculations and record-keeping. For example, Awditify's payroll module integrates with bookkeeping and automatically posts journal entries, reducing data entry errors.

Step 5: Remit Source Deductions to CRA

Remittances are due based on your remittance frequency. Use CRA Form PD7A (or the online equivalent in My Business Account) to remit the total of employee and employer CPP, EI, and income tax. You must remit all three amounts together - you cannot pay only the employee portion.

Key deadlines:

If you miss a deadline, CRA charges interest from the due date to the date of payment, plus a penalty of 3% if you are one to three days late, 5% if four to five days late, 7% if six to seven days late, and 10% if more than seven days late. Repeated late remittances can trigger a higher penalty rate.

Step 6: File T4 Slips and T4 Summary

By the end of February following the calendar year (e.g., February 28, 2027 for 2026), you must file T4 slips for each employee and a T4 Summary (Form PD7A is not the same - the T4 Summary is filed separately). T4 slips report the employee's total employment income, CPP contributions, EI premiums, income tax deducted, and other information like pension adjustment and union dues.

File electronically using CRA's Web Forms or Internet File Transfer if you have more than 50 T4 slips (mandatory). For fewer than 50, you can file on paper. The penalty for late filing is $25 per day per T4 slip, minimum $100 and maximum $2,500 for a single slip, with a total cap of $25,000 for all slips. If you knowingly fail to file, the penalty is $100 per slip with no cap.

Step 7: Reconcile Payroll at Year-End

After filing T4s, reconcile your payroll records with CRA's records. Use your PD7A statements and the amounts reported on T4s to ensure total remittances match total deductions plus employer contributions. Common discrepancies include:

• Using wrong CPP or EI rates mid-year (e.g., after a rate change in January)
• Forgetting to include taxable benefits (e.g., employer-paid life insurance, vehicle personal use)
• Miscalculating EI premiums for employees who reach the maximum insurable earnings mid-year

If you find an error, you must file an amended T4 or adjust your PD7A through My Business Account. CRA may also send a matching letter if their records don't align with your filings. Respond within 30 days to avoid automatic reassessments.

Common Payroll Mistakes and How to Avoid Them

Even experienced payroll processors slip up. Here are the most frequent errors:

• Misclassifying employees as independent contractors: If you control how, when, and where the work is done, the worker is likely an employee. CRA uses a 10-factor test. Misclassification can result in back taxes, CPP/EI, and penalties for up to six years.
• Using wrong provincial tax tables: If an employee works in multiple provinces, use the province of the employee's establishment. For remote workers, use the province where they report to work.
• Forgetting to remit on time: Set calendar reminders for remittance due dates. Use CRA's My Business Account to authorize pre-authorized debits.
• Not tracking year-to-date amounts: Manually tracking YTD CPP and EI can lead to over-contributions or under-remittances. Software automates this.

Many Canadian accounting firms and small businesses use integrated platforms to reduce these risks. For instance, Awditify for Accounting Firms centralizes payroll, bookkeeping, and client collaboration in one place, so you never have to re-enter data or reconcile separate systems.

FAQ: How to Run Payroll in Canada

Do I need a separate bank account for payroll?

No, but it's strongly recommended. A dedicated payroll account makes it easier to track remittances and avoid commingling funds. If you use a single business account, ensure you have sufficient funds before each pay date and remittance deadline.

What is the penalty for late payroll remittance?

CRA charges interest at the prescribed rate (currently 9% per annum) plus a penalty of 3% to 10% depending on how late the remittance is. Repeated late remittances can increase the penalty rate. For example, a $5,000 remittance one week late could cost $350 in interest and penalties.

Can I run payroll myself without software?

Yes, you can use CRA's Payroll Deductions Online Calculator and manual spreadsheets. However, this is time-consuming and error-prone, especially as your team grows. Most businesses with more than two employees use payroll software to automate calculations, remittances, and T4 filing.

What are taxable benefits and how do I report them?

Taxable benefits are non-cash compensation that must be included in the employee's income, such as employer-paid life insurance premiums, personal use of a company vehicle, or subsidized housing. Report the value of the benefit on the T4 in Box 14 and Box 40 for automobile benefits. You must also add the benefit to the employee's pensionable and insurable earnings.

How do I handle payroll for a deceased employee?

Issue a final T4 for the year of death, reporting all income paid up to the date of death. Do not deduct CPP or EI on payments made after death (e.g., final vacation pay). Send the T4 to the estate's representative. For remittances, you still owe CPP and EI on amounts paid before death.

Conclusion

Running payroll in Canada is a multi-step process that demands accuracy with CRA rates, deadlines, and forms. The single most important takeaway is to set up a reliable system - whether that's a detailed spreadsheet, a dedicated accountant, or integrated software - and stick to it. One missed remittance or misclassified worker can cost thousands in penalties and hours of correction. If you're managing payroll alongside bookkeeping and client reporting, consider a platform that handles all three. Awditify's payroll features are built for Canadian rules, so you can focus on growing your business instead of chasing compliance.