Get a free, no obligation personal loan quote with rates as low as 6.99%
Get Started You can apply with no effect to your credit score

For businesses that are considering hiring an employee or already have a team of employees, figuring out how to do payroll can be an overwhelming process. Although, the process of setting up payroll shouldn’t be ignored or avoided as there can be legal and financial implications. Let’s take a look at everything you need to know from hiring your first employee to more long term needs like annual responsibilities. 

Do you have the right merchant account or your business? Learn more here.

Why Do I Need To Set Up Payroll?

As your business grows, you may need to hire additional help. When doing so, you will need to consider whether you are looking to bring on a salaried employee or one who is compensated hourly. A salaried employee is a worker that is paid a fixed salary per year regardless of how many hours they actually work whereas hourly employees are compensated based on an hourly rate. As the employer, you will be responsible for deducting CPP contributions, EI premiums, and income tax from each paycheque. Payroll systems can also track other pay earnings and deductions such as bonus payments and pension withdrawals. 

Another option is to contract a freelance worker rather than to hire an employee. Freelance workers typically charge for specific tasks or projects that they take on and compensation is not subject to payroll deductions as they are not considered to be your employee. 

Setting up payroll will help your business stay organized, track pay and deductions, and can entitle the corporation to tax benefits as well, even if you are just paying yourself as an employee to your own corporation. Lastly, using a payroll system can automate the process. Performing payroll duties manually is complex which can cause errors easily. 

What Information Do I Need To Set Up Payroll?

In order to set up payroll, you will need to gather information from your employees. This includes their contact information, mailing address, date of birth, social insurance number, bank account information and TD1 forms. Form TD1, also known as the Personal Tax Credits Return, is a form provided by the Canada Revenue Agency that is used to determine the amount of tax that is to be deducted from an employee’s income. In addition to collecting employee information, it is customary and best practices to have an employment agreement in place which clearly states their job duties, compensation and other conditions of employment.

Everything you need to know about creating a business invoice.

Steps To Set Up Payroll For Your Small Business

Once you’ve gathered all the information about your employees, it’s time to set up payroll. Below are the steps involved with setting up and maintaining payroll for your employees.

  1. Gather employee information: As mentioned previously, you will need a number of items from your employees. If you are planning to conduct payroll using direct deposit, you will need their bank account information in addition to personal and legal information. 
  2. Choose a payroll processing method: You can either pay your employees manually with ledgers, cheques, or e-transfers. Alternatively, you can use payroll software to run payroll and calculate remittances. The size of your business and how familiar you are with calculating deductions and remittances should be the key factors in deciding whether to process payroll manually or with the help of software. Keep in mind that manual payroll can be complex and subjected to errors. 
  3. Decide on payroll frequency: The most common payroll frequencies in Canada are bi-weekly and semi-monthly. However, you can also pay employees weekly or monthly. Typically, it is better to use a bi-weekly pay period for hourly employees and a semi-monthly pay period for salaried employees. Although, you may want to consider the cash flow cycles of your business as well. 
  4. Register your business for payroll: Using your business number, you will need to register for a payroll account with the CRA. This can be done by contacting the CRA business enquiries line or by submitting a completed RC1 (request for a business number and certain program accounts) to your tax centre.
  5. Run payroll: At this point, the setup work is complete, now you can run payroll. If you’re using a payroll software, the first step is to enter the gross amount of pay and manual adjustments. The system will handle the rest. As for manual payroll, you will likely want to use a spreadsheet to track all your calculations in case you need to refer to them again. 
  6. Submit payroll remittances to the Receiver General (CRA): When running payroll, employers need to withhold source deductions from their employee’s pay. This includes CPP, EI, and income tax. Deductions are to be remitted to the Receiver General (CRA) at regular intervals and there can be stiff penalties for businesses that make their remittances late or in error.

Do you know what accounts receivable is? Find out here.

Annual Duties

Each year, businesses are required to prepare a T4 for each employee that worked for them that year. A T4, also known as a Statement of Remuneration Paid, is often referred to as a T4 slip and it outlines all salary, wages, tips or gratuities, bonuses, vacation pay, commissions or other compensation that an employee received throughout the year. 

One thing to note is that special payments are considered to be taxable income, but may not be taxed the same way as regular wages. Bonuses can be considered either: 

  • Supplemental (in addition to wages)
  • Discretionary (holiday or performance bonuses), or 
  • Non-discretionary (non-optional bonuses as stipulated in the employment contract).

A Word On Payroll Systems

Employees are likely the most expensive cost your business will incur. After all, employees are the backbone of any business. This is precisely why the payroll systems are so important. 

The payroll system you choose should appropriately service your employees. For example, if your employees are primarily hourly, a system that has time cards and approvals is ideal. On the other hand, if your employees are primarily salaried, then a basic system will usually suffice. 

The payroll system should cater to your employees’ needs, whatever they may be. This will make your operations simple in the short and long run. Just be sure to identify what the needs are. 

Veronica Ott avatar on Loans Canada
Veronica Ott

Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.

More From This Author

Special Offers

More From Our Experts

https://loanscanada.ca/wp-content/uploads/2017/09/ported-motgage.png
Porting A Mortgage | What Does It Mean?

By Bryan Daly
Published on June 11, 2024

Everything you need to know about porting your mortgage and when it's actually a good idea.

https://loanscanada.ca/wp-content/uploads/2017/12/Deed-in-Lieu-of-Foreclosure.png
Deed In Lieu Of Foreclosure In Canada: An Alternative To Foreclosure

By Lisa Rennie

A deed in lieu of foreclosure is when you agree to voluntarily hand over the deed to your home to the lender instead of going through a foreclosure.

https://loanscanada.ca/wp-content/uploads/2013/10/Condo-vs-house.png
Pros And Cons Of Buying A House vs Buying A Condo

By Lisa Rennie

What are some of the disadvantages and advantages of buying a house or a condo?

https://loanscanada.ca/wp-content/uploads/2024/06/Moi-Program-1.png
What Is The Moi Program?

By Savanna Craig

Are you wondering if the Moi program is worth it? Find how much Moi points are worth and where you can earn them.

https://loanscanada.ca/wp-content/uploads/2012/08/monthly-costs-of-owning-a-house-ontario.png
The Costs Of Owning A Home In Ontario

By Lisa Rennie

Wondering how much it costs to own a home? Let's look beyond mortgage closing costs and analyze exactly are the monthly costs of owning a house in Ont...

https://loanscanada.ca/wp-content/uploads/2024/05/best-time-to-buy-a-house.png
When Is The Best Time To Buy A House?

By Lisa Rennie

Learn how to determine whether or not it's a good time to purchase a house.

https://loanscanada.ca/wp-content/uploads/2018/01/power-of-sale.png
What Is A Power Of Sale For A Mortgage?

By Jessica Martel

A power of sale essentially allows the lender - not the homeowner - to sell the home if the borrower defaults on the mortgage.

https://loanscanada.ca/wp-content/uploads/2021/06/BC-Disability-Assistance.png
Do You Qualify For Disability Assistance In BC?

By Matthew Taylor

The BC Disability Assistance Program provides monthly disability assistance payments to people with the Persons with Disabilities (PWD) Designation.

Recognized As One Of Canada's Top Growing Companies

Loans Canada, the country's original loan comparison platform, is proud to be recognized as one of Canada's fastest growing companies by The Globe and Mail!

Read More

Why choose Loans Canada?

Apply Once &
Get Multiple Offers
Save Time
And Money
Get Your Free
Credit Score
Free
Service
Expert Tips
And Advice
Exclusive
Offers

Build Credit For Just $10/Month

With KOHO's prepaid card you can build a better credit score for just $10/month.

Koho Prepaid Credit Card