A Guide to Small Business Payroll Rules in Canada

A Guide to Small Business Payroll Rules in Canada

As a business owner, understanding Canadian small business payroll rules and federal laws can be challenging. However, following the often complex payroll rules is a must to ensure that your employees receive their wages on schedule and avoid paying costly penalties from government agencies.

If you’re a first-time small business owner, getting the payroll right is possible, even if you don’t have an experienced HR department to handle the job. Here, we take a closer look at what you need to know before navigating the often stressful realm of payroll management for small businesses.

Table of Contents

Payroll: What to Consider Before Hiring Employees

Ideally, you should think about payroll before hiring your first employee. A lot goes into payroll because you have to adhere to the federal and provincial employment standards concerning:

  •       Minimum wages
  •       Vacation and severance pay
  •       Statuary holiday pay
  •       Standard and overtime pay structures

Pay isn’t the only consideration to make before the hiring process. Employee contracts or agreements should feature the position’s hourly wage or annual salary as well as worker benefits, anticipated work schedules, bonuses, position responsibilities, and probationary periods.

Some employee benefits are taxable, while others are tax-free. For example, a Health Spending Account is a tax-free account that employees pay into to cover additional medical expenses not covered entirely by an employer or provincial healthcare plan, such as copays, dental appointments, and prescription drugs.

Employees Vs Independent Contractors

There are different sets of small business payroll rules for paying employees and independent contractors. Unfortunately, many new business owners misunderstand the differences between what constitutes an employee and a contractor.

The Canada Revenue Agency (CRA) administers Canada’s federal tax laws for most provinces. The agency uses a four-point test to determine if an employer classifies their employees for payroll purposes. It’s illegal to treat an independent contractor as an employee and vice versa, so it’s best to learn the basics of the test to stay on the right side of the law.

While taking on the perspective of a business owner, ask yourself the following questions within each point of the CRA test to find out where you stand as an employer with employees or contractors.


Tool and Equipment Ownership

Chance of Profit or Loss

Services Integration

Small Business Payroll Frequency

Payroll frequency refers to how often employees receive payment for the work they provide within a specific period. Examples of payroll frequencies are:

  •       Weekly
  •       Bi-weekly
  •       Twice monthly
  •       Once monthly

Determining payroll frequency for a small business well in advance — at least a year — will help you create simplified pay schedules for all employees that fit neatly into a payroll service like QuickBooks. If you choose not to use a payroll management system, you could spend a lot of time doing payroll, especially if the frequency is weekly.

Pay Statements

How to Communicate Payroll Plan with Employees

After determining your payroll frequency, developing a pay schedule, and deciding between paper and paperless pay statements, you’ll need to communicate the payroll plan to employees.

Ideally, everyone should receive their pay on the same day. Every employee should also be completely aware of what to expect with their income. For instance, they need to know how they will receive their wages (e.g., direct deposit, paper check, etc.) and their benefits aside from a base salary or hourly wage (e.g., bonuses, paid time off, group health benefits, etc.).

Executing the payroll plan for every employee at once can be tricky. Not everyone will show up for team meetings, even if they’re mandatory. Even if people attend the meeting to discuss payroll expectations, there’s no guarantee they will pay attention.

The most effective way to get everyone on the same page is to document all payroll scheduling, benefits, and employee responsibilities. Though you may have to hold periodic meetings to go over policy changes or employee concerns, it’s better to provide everyone with an employee handbook that clearly outlines what they can expect from your company’s payroll process.

Payroll Options

When it’s time to do payroll, it helps to settle on an effective and efficient system for your business’s needs. Many considerations go into every payroll period, including employee needs, company cash flow, taxes, and regulations. Small businesses risk spending more time and money on payroll if they don’t choose the best solution for their current and future needs.

Manual Payroll

Online Payroll with Software

What to Know About Small Business Payroll Deductions and Remittances

Understanding payroll deductions and remittances is essential if you want to manage payroll effectively. You must submit these figures to the CRA following a specific schedule, and everything must be accurate. Otherwise, the agency has the right to audit your business.

Payroll deductions refer to the amounts you have to withhold from an employee’s earnings. Types of deductions include the Canada Pension Plan or CPP contributions and employment insurance premiums. Remittances are the amount you send the CRA after lawfully compensating employees through:

  •       Wages
  •       Salaries
  •       Commissions
  •       Pension income
  •       Taxable benefits
  •       Bonuses

When your remittance date draws near, you’ll need to complete a form with the total amounts of every type of withheld income. Then, you send the form to the CRA. Remittances must be accurate down the last cent and remitted on time every time.

Essential Small Business Payroll Rules to Follow

Register with Federal Agencies

Remit Deductions and Taxes to the CRA


Understand Small Business Payroll Rules with Group Enroll

Two of the critical rules to follow for a successful small business are to abide by all federal and provincial payroll regulations and keep your employees happy with group benefits. Group Enroll is an insurance broker that will gladly help you explore various group insurance coverages to include with your pay packages to ensure that employees are healthy and happy.

Complete our straightforward online form today, or learn more by emailing our team at hello@groupenroll.ca. You can also request information by mail at 10 Great Gulf Drive, Unit 5, Vaughan, ON, 4K 5W1.