Managing your business’s payroll

What does it mean to manage a business’s payroll?

Managing payroll involves calculating what each employee actually receives, withholding the amounts owed to the government from their pay (source deductions), paying the employee their net pay, and then remitting the withheld amounts to the CRA and Revenu Québec. You also maintain records and prepare year-end forms.

• Calculate gross pay (hourly rate or fixed salary, hours worked, bonuses, vacation pay);
• Calculate withholding taxes on this gross amount;
• pay the employee their net pay;
• Record employer contributions (the employer’s share);
• submit government withholdings by the due dates;
• Generate year-end statements and forms (T4 at the federal level, Relevé 1 in Quebec).

Payroll touches on three areas at once: tax compliance, labour law, and your accounting. That’s why even a small mistake can quickly snowball. An incorrect withholding calculation skews not only the net pay but also your tax refund and your year-end tax forms.

Bankeo isn’t an accounting firm: get matched with an accountant who sets up your payroll correctly from the start and saves you from costly corrections.

How do you process payroll for your first employee?

Before paying your first employee, open a payroll withholding account with the CRA and register as an employer with Revenu Québec. Next, collect your employee’s tax credit forms (federal TD1, provincial TP-1015.3), then calculate the deductions for each paycheck.

1. Get your employer numbers. Add a payroll deduction program (RP) account to your business number with the CRA, and register with Revenu Québec.
2. Have employees fill out the loan applications. The employee fills out the federal TD1 form and the Quebec TP-1015.3 form.
3. Choose the payroll frequency. Weekly, every two weeks, bimonthly, or monthly.
4. Calculate Withholding Taxes on each gross salary.
5. Pay Net Pay and Keep Records. Clear Pay Stubs, hours, deductions, annual accrual.
6. Schedule payments and pay stubs. Make a note of your due dates and prepare your T4s and RL-1 slips.

Good to Know: Becoming an employer also entails certain labour law obligations (minimum wage, vacation pay, maximum pay period). These rules are governed by your province’s labour standards.

Hiring the first employee is often the moment when an entrepreneur realizes they need structured support. Get matched with an accountant who will set up your employer accounts, configure your software, and validate your first payroll.

What are source deductions?

Source deductions are the amounts you deduct from each employee’s gross pay to remit to the government. In Quebec, these include federal and provincial income tax, the Quebec Pension Plan (QPP), Employment Insurance (EI), and the Quebec Parental Insurance Plan (QPIP). The employer also contributes its own share.

• Deductions from the employee’s pay: Federal tax (CRA), provincial tax (Revenu Québec), RRQ, EI, and QPIP.
• Employer’s share (in addition): QPP (employer’s share), EI (generally higher than the employee’s), QPIP (employer’s share).

Two important points to keep in mind: the cost of an employee goes beyond their salary (budget for employer contributions from the moment you hire them), and the money withheld isn’t yours (source deductions are held in trust for the government). Contribution rates and maximums change every year: up-to-date software automatically applies the correct rates.

How and when should you report deductions to the CRA and Revenu Québec?

You file your source deductions forms with the CRA (federal portion) and Revenu Québec (provincial portion) at a frequency determined by your remitter status, which depends on your payroll total. Most small businesses file by the 15th of the month following payroll. Late filing penalties are immediate and severe.

• Small Employers and New Businesses: Monthly payment, usually on the 15th of the following month.
• Higher payroll: More frequent rebates, granted by the CRA and Revenu Québec.
• Two tiers, two discounts: The federal portion goes to the CRA, and the Quebec portion goes to Revenu Québec.

Good to Know: Late filing of source deductions forms is one of the most severely penalized errors in Canada. Since these are trust funds, directors may be held personally liable. The end of the year adds another step: filing T4 slips and RL-1 slips for each employee, generally by the end of February.

Employee or Self-Employed: Why does the difference matter so much?

An employee receives a paycheck with payroll deductions and a T4 form. A self-employed worker bills for its services, handles its own taxes, and has no source deductions. Misclassifying a worker as self-employed when they are actually an employee is a common mistake, and the business bears the consequences in the event of reclassification.

• Work Supervision: The business manages (employee) or the individual organizes their own work (self-employed).
• Tools and Equipment: provided by the business (employee) or by the individual (self-employed).
• Financial Risk: None, guaranteed salary (employee), or income may vary (self-employed).
• Integration and Exclusivity: Integrated and, most importantly, designed for you (as an employee) or for multiple clients (if you’re self-employed).

If you treat someone as a self-employed individual when the relationship is actually an employment relationship, the CRA or Revenu Québec may reclassify the relationship retroactively, with unpaid source deductions, employer contributions, interest, and penalties. Before hiring someone or signing a service contract, consult with an accountant who can verify the correct employment status.

Should you outsource payroll or handle it yourself?

You can handle payroll yourself with the right software, but this leaves you vulnerable to calculation errors and late payments. Outsourcing to an accountant or payroll service transfers the risk, saves you time, and ensures compliance. The right choice depends on the number of employees, your risk tolerance, and the time available.

• In-House Payroll (Software): Low direct costs and control, but you’re responsible for any errors or delays. For 1 to a few employees, it’s a simple situation.
• Accountant or Bookkeeper: Validated calculations, managed deductions, and generated pay stubs, all for a recurring service fee. For small and medium-sized businesses seeking compliance and peace of mind.
• Specialized Payroll Service: Automation, multi-province compliance, with fees based on volume. For a growing payroll.

For many business owners, the math is simple: a single late payment penalty often costs more than months of payroll services. Outsourcing isn’t a luxury, it’s risk management.

What are the most common payroll mistakes?

The most common payroll errors include late filings with the CRA or Revenu Québec, using outdated contribution rates, misclassifying employees as self-employed, failing to account for employer contributions in the budget, and inconsistent year-end statements.

• Submit late. The most costly mistake. Mark your due dates and never touch the withheld funds.
• Keep old rates. The QPP, EI, and QPIP maximum benefit amounts change every year.
• Confusing take-home pay with actual cost. Forgetting to account for employer contributions will throw off your budget.
• Classifying an employee incorrectly. Reclassification is retroactive and costly.
• Incomplete pay stubs and records. You’re vulnerable in the event of an audit or a dispute.
• Pay stubs that don’t match. The T4 and RL-1 slips must match the year’s payroll payments.

Good to Know: Almost all of these errors can be prevented by setting up a proper system from the very first employee. The cost of prevention is minimal compared to the cost of corrections and penalties.

When should you outsource your payroll to an accountant?

Entrust your payroll to an accountant as soon as you hire your first employee, or as soon as you’re unsure about deductions, tax credits, or an employee’s status. It’s also a good time to do so as your team grows, when you’re managing tips or employees in multiple provinces, or simply when payroll is taking up time you’d rather devote to your business.

• You’re hiring your first employee and need to set up your payroll accounts;
• You have received a notice from the CRA or Revenu Québec regarding your payments;
• Your payroll is growing, and the payment schedule is changing;
• you operate in more than one province or deal with individual circumstances;
• The end of the year is approaching, and you need to file T4s and RL-1 slips.

With Bankeo, you fill out a free application and are matched, usually within 48 hours, with vetted accountants who specialize in payroll in Canada. The service is free for business owners, with no obligation, and we’re here to support you: if you’re no longer satisfied with your accountant, we’ll find you a new one at no cost.

How much does payroll management cost for a small business?

The cost varies depending on the number of employees, the complexity of payroll, and the option you choose (software, an accountant, or a specialized service). Beyond the price, consider the cost of a mistake: a single late filing with the CRA results in a penalty that often exceeds several months’ worth of service. Get matched for free with an accountant who can determine the right solution for you.

Do I need an accountant to handle payroll?

It’s not mandatory, but it’s highly recommended from the moment you hire your first employee. Payroll involves tax, labour law, and accounting all at once. An accountant will set up your employer accounts, apply the correct rates, manage your tax payments, and generate your tax forms, which helps you avoid penalties. The matching with Bankeo is free.

When do I need to remit withholding taxes?

Most small businesses make monthly payments and must pay by the 15th of the month following the pay period. Your exact payment frequency depends on your payroll total and is determined by the CRA and Revenu Québec. The federal and provincial portions are subject to two separate payments.

What’s the difference between an employee and a self-employed worker when it comes to payroll?

An employee receives a paycheck with source deductions and a T4 form at the end of the year. A self-employed worker invoices for their services and manages their own taxes, without any source deductions. The classification depends on the nature of the working relationship. Misclassifying an employee as self-employed exposes your business to retroactive reclassification and penalties.

How does Bankeo help me with payroll?

Bankeo is not an accounting firm and does not handle your payroll. We’ll match you, for free, usually within 48 hours, with the right accountant for your situation from a network of payroll professionals in Canada. You fill out a request, we introduce you to as many vetted accountants as needed to find the right match, at no cost and with no obligation, and we’re always there to support you: if the accountant is no longer a good fit, we’ll find you another one, at no cost.

What happens if I file my withholding payments late?

Late payment of withholding taxes is one of the most heavily penalized violations in Canada. The penalty is applied to the overdue amount and increases with each passing day. Since these are trust funds, company directors may be held personally liable. An accountant monitors your deadlines to ensure this never happens.