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.

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.


Ask yourself:

  1. Who has control of the business?
  2. Who determines everyone’s schedules, duties, and responsibilities?
  3. Who hires workers?

If the answer to each question is you, you are an employer with employees. However, if the worker performs assigned duties but operates according to their own schedule, you’re in a business arrangement with an independent contractor.

Tool and Equipment Ownership

Ask yourself:

  1. Who owns the work tools and equipment to complete tasks?
  2. Do workers expect to use the equipment the business supplies to do their job?

If you own and provide essential work equipment, you’re an owner. Independent contractors use their personal tools and equipment to complete tasks.

Chance of Profit or Loss

Ask yourself:

  1. Who is at risk of losing money from the business outside of the agreed-upon service payment?
  2. Who could earn a profit outside of the agreed-upon payment terms for services?

You are in a business relationship with a contractor if they carry the weight of earning profits or taking losses. However, you have an employer-employee relationship as the employer if the worker has no stake in profit earnings or losses.

Services Integration

Ask yourself:

  1. Does the person who provides services operate within the fold of your business?
  2. Does the person providing services with your company also provide the same assistance to other individuals or entities outside your business?

You are an employer with employees if a worker performs duties or services for you based on the schedule you set for them. On the other hand, you are a business owner working with an independent contractor if the service provider works outside your place of business and has other clients.

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

Regardless of the number of employees on staff, federal law states that each worker must receive a wages statement that aligns with the payroll frequency. The reports should contain the following at a minimum according to the Canadian Payroll Association:

  •       Employee and employer names
  •       Pay period and payment dates
  •       Hourly rate
  •       Hours worked
  •       Vacation payments
  •       Commissions
  •       Bonuses
  •       Living allowances
  •       Net pay and gross earnings
  •       Itemized deductions

Small business payroll rules don’t specify whether pay statements must be electronic or paper. However, paperless statements are highly cost-effective and straightforward. You can be sure you’re staying well within the parameters of federal law by emailing every employee their pay statement or setting up a secure company network where they can retrieve their documents using a personal login and password.

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

Many small businesses with a handful of workers use a manual payroll system. This option is beneficial for micro and small businesses because it usually doesn’t require more than a calculator and a well-organized spreadsheet. Utilizing free online calculators to help determine every person’s pay, tax withholdings, and other deductions makes the process easier.

Manual payroll is cost-effective and allows business owners to maintain a high level of control over the system. However, it is time-consuming and has an increased risk for errors.

Online Payroll with Software

Most medium- and large-size businesses use online payroll software to make it easier for HR departments to keep track of a high number of employees. However, smaller enterprises can also benefit from electronic services to reduce costs and spend less time computing pay and deductions.

With online payroll systems, uploading and computing information is simple and takes seconds. Another benefit is the automatic calculations of payroll and taxes. Unfortunately, these systems operate in the cloud for accessibility anywhere with internet service, so you can’t do payroll if the internet is out.

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

Paying workers “under the table” without following payroll protocols is not advisable. Without payroll tax deductions, it can be difficult for everyone to accurately report and pay taxes during tax time.

Business owners must obtain a Business Number and payroll program account to run payroll legitimately in Canada after registering the company with the CRA. Some businesses may also need to register accounts with the Ontario Ministry of Finance and Ontario Workplace and Safety Board to remit health tax payments.

Remit Deductions and Taxes to the CRA

CRA regulations require businesses to remit their payroll deductions, federal taxes, CPP deductions, and provincial taxes to the agency by the 15th of the month after every pay period. Established businesses can remit their documents following quarterly, bi-monthly, or weekly schedules if the original plan doesn’t work for them. You do so electronically or by paper.

How to Solve Common Small Business Problems Effectively

Read about even more ways to streamline your business in our How to Solve Common Business Problems Effectively article.

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 [email protected]. You can also request information by mail at 10 Great Gulf Drive, Unit 5, Vaughan, ON, L4K 0K7.

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