How to set up payroll for your small business in Canada

Doing payroll for your small business in Canada isn’t always simple, but doesn’t have to be hard if you follow some necessary steps to set it up. While working with a professional payroll assistance company is the best way to ensure your payroll is correctly set up, your small business can follow this general guideline.

1. Register with necessary federal agencies

Before setting up your payroll, you need to register your small business with certain federal agencies. First, obtain or update your business number, or BN, through Canada Revenue Agency (CRA) so that your business can be identified by the federal government. This will allow you to remit statutory deductions, such as employment insurance, income tax, and Canada Pension Plan. You will receive a 15-digit payroll program account number and a nine-digit unique identifier number.

Additionally, businesses with employees have to pay Employer Health Tax and can register through the Ontario Ministry of Finance. The cost of this tax can range from 0.98 percent of payroll to 1.98 percent. Within 10 days of hiring your first employee, your business must register with the Ontario Workplace Safety and Insurance Board.

2. Collect Information From Employees

Certain information needs to be collected from employees to determine payroll deductions through TD1 forms. You’ll need the following information from employees:

  • Name
  • Address
  • Phone number
  • Social Insurance Number (SIN)
  • Date of birth
  • Bank account information (for direct deposit)

You can locate and download TD1 forms from the CRA website and enter employee information into your payroll software.

3. Calculate gross wages and taxes

The next step in setting up payroll for your small business is to calculate earnings before payroll deductions. An employee’s gross wages are expressed through their hourly or yearly pay, as determined in their offer of employment. Additionally, you’ll have to calculate taxes, retirement contributions, and reimbursements such as cell phone or parking costs.

Your business must withhold a portion of an employee’s wages for taxes, including Federal income tax, Provincial or territorial income tax, Canada Pension Program or Quebec Pension Program contributions, Employment Insurance premiums, and Registered Retirement Savings Plan contributions.

4. Pay your employees

Using your payroll software, you can send out employee paychecks after checking for errors. You can check for errors before processing payroll by comparing a list of payroll transitions to your tax records. Record payroll journal entries in your accounting software by integrating your payroll and accounting.

5. Send deductions and taxes

An important step in the payroll process is sending the deductions and calculated taxes to various agencies. Federal taxes, provincial taxes, CPP deductions, and EI deductions go to the CRA, while QPP deductions go to Quebec’s revenue agency.

Generally, businesses remit payroll deductions in the form of paper or electronically by the 15th of each month following the pay period. Once you establish your business, you may be able to change your payroll tax remittance to quarterly or twice-monthly.

6. Share Form T4

The final step in setting up payroll is submitting a packet of Forms T4 to the CRA. Each February of the following year, each employee fills out this form, which summarizes their earnings and deductions from the previous year.

Need help with your payroll?

As a small business owner, you should know how payroll works but can stress less from the assistance of payroll software to handle all the calculations. At Leonard Tam Professional Corporation, our team of dedicated individuals works to support small businesses in Canada by providing payroll services designed to give you peace of mind. Sign up for a free consultation today!

Three businesswomen setting up payroll for small business in Canada.