Hiring your first employee in Canada is a great business milestone. Up to this point, you’ve probably done everything yourself. Now you’re trusting someone else to help you grow and manage the business. It feels exciting, but it also comes with responsibilities that many first-time employers don’t expect. Payroll is one of them.
If this is your first time hiring your first employee in Canada, you may be confused and lost, especially with all the tax rules, CRA accounts, deductions, forms, and deadlines you have to abide by. Miss something, and you might get hit with a penalty. Do it right, though, and payroll becomes a smooth process instead of a monthly panic.
So, let’s break down what you need to know before you issue you hire your first employee and issue their first paycheque. This is practical payroll guide will help you set things up properly from day one.
Understanding Your New Responsibilities as an Employer
Once you hire an employee, everything changes. You’re no longer just a business owner. You’re an employer, and that title comes with legal obligations. As an employer, you now hold the responsibility of abiding by all labour laws and ensuring your employees are treated fairly in the work place. This aspect may require you to now play the role of a human resource manager or hire one for your business. Other major responsibilities as an employer include:
- Knowing various tax responsibilities you hold as an employer
- The rate of pay appropriate for employees in the market place
- Who is considered an employee or contractor
- Employer pay schedule and tax remittance
- Employee and employer handbooks with workplace rules and regulations
- Safety concerns in the workplace
- Work hour rules including vacations, stat holidays, etc
- Equipment usage for employees
- Payroll year end filings
While this is not an exhausted list of responsibilities, it is definitely a start. Before hiring your first employee, it is best to have all documentations and appropriate registrations in place. Not doing so can impose serious fines for your business.
Registering as an Employer With the CRA
Before you run payroll, the most important thing you need to do is register for a CRA payroll account. This can be done by visiting your CRA account. Before you register for a CRA number, you first need to obtain a business number. Once you get a business number, you’ll then be able to register for a payroll number. You must open a payroll program account so the CRA can track your payroll deductions and remittances.
Registration is pretty straight forward, but employers make mistakes by choosing the wrong start date or guessing at pay frequency. Take your time. Anything you enter here affects your future remittance deadlines.
While you’re setting things up federally, you may also have federal obligations to abide by. For example, depending on the risk, almost every province requires you to register for workers’ compensation. In Ontario, that’s WSIB. In BC, it’s WorkSafeBC. Some provinces also have employer health taxes depending on your payroll size. Many new employers skip this and find out about it years later when a bill shows up.
Once registration has been approved and appropriate paperwork has been issues, you may then start hiring your first employee.
Collecting Employee Information and Setting Up Their File
So now you’ve obtained all your appropriate paperwork and registrations. Once you hire someone, you need their information to get payroll right. There are a few more forms that employees need to complete to ensure all appropriate information regarding their employment is obtained for work. These include:
- A federal TD1 and the matching provincial TD1. These forms tell you how much tax to withhold.
- Banking information for direct deposit
- A clean employment contract
- General information about the employee
Once these items are collected, they need to be retained securely. Employers need to have a separate file for each employee. Setting up an employee file isn’t just paperwork. It’s compliance. The CRA expects you to keep accurate records, and employment standards legislation requires you to document hours, wages, and agreements. Protect the information and store it securely. You’re responsible for safeguarding it.
Understanding Payroll Deductions
Payroll deductions is the most important concept to understand before running payroll. Payroll deductions are the taxes collected and paid to CRA on behalf of employees. They include: income taxes (federal and provincial), CPP, and EI. These deductions are affected by the gross pay and therefore all calculating pay must be accurate for very pay run.
Here is how payroll deductions work. With every paycheque, you must deduct income tax, CPP contributions, and EI premiums. For income tax, the TD1 forms completed by each employee during their hiring will help you calculate this tax portion. For CPP and EI, there are specific rules based on earnings and specifications. As the employer, you match the CPP and pay 1.4 times the employee’s EI contribution.
Income tax is the one that changes most often. Bonuses, overtime, vacation payouts, and commissions all affect the calculation. The CRA’s Payroll Deductions Online Calculator keeps you aligned with current rates. Use it.
Some situations require extra care. For instance, commission employees might have irregular earnings that make source deductions tricky. Seasonal workers may have EI considerations. Students sometimes have exemptions. The important part is to check, not assume.
Choosing a Pay Schedule
Depending on your province, you may have to choose a pay schedule for your pay runs. Your pay frequency is important because it affects everything from employee morale to your monthly cash flow. Canada allows weekly, bi-weekly, semi-monthly, or monthly pay schedules, but provinces can set minimums. For example, some provinces don’t allow monthly pay for hourly workers.
If cash flow is tight or unpredictable, bi-weekly can make things easier. Semi-monthly keeps things clean for accounting but complicates payroll for hourly employees because of overtime rules and varying hours. Weekly can be expensive in terms of admin time.
The right schedule is the one that keeps you compliant and supports your business rhythm.
Running Payroll: Manual or Software?
Running payroll manually or with is software – which is best? Manually running payroll can be quite an extensive undertaking and given how accurate payroll needs to be, it is not really recommended. Because you’re calculating taxes, tracking deductions, updating year-to-date totals, creating records, issuing pay stubs, and filing remittances, there could be a lot of room for human error.
A better choice is to use payroll software. Most small businesses use payroll software like Wagepoint, QuickBooks Payroll, or ADP to run payroll. These tools automate calculations, generate pay stubs instantly, and prepare ROEs and T4s at year-end. They also remind you when remittances are due. For the cost of a few dollars per employee each month, you eliminate most of the risk and inaccuracy that come with running payroll yourself.
A third alternative is to outsource payroll entirely. If your time is already stretched thin, or you’re adding multiple employees at once, outsourcing can be a smart move. The key is knowing when doing it yourself stops making sense for you and your business.
Payroll Remittances to the CRA
Once you run payroll, your job isn’t done. You must send the payroll deductions to the CRA by your remittance deadline. New employers are usually monthly remitters, meaning you send your deductions by the 15th of the following month.
What you remit includes the employee’s income tax, the employee and employer portions of CPP, and the employee and employer portions of EI. Miss the deadline, and penalties start immediately. It’s one of the most common mistakes small businesses make.
Remittances can be sent through CRA My Business Account, online banking, or directly through payroll software. The important thing is consistency. Keep a record of every payment so you can reconcile your totals at year-end.
Statutory Holidays, Vacation Pay, and Overtime
This is where payroll intersects with employment standards, and the rules vary widely from province to province. Statutory holidays, vacation pay and overtime need to be carefully handled when running payroll.
When it comes to statutory holiday pay, every province has its own statutory holidays, eligibility rules, and formulas for calculating holiday pay. Some require an average of hours worked. Some use regular pay. Others combine both. Unfortunately, if you have part-time or irregular workers, this gets more complicated.
Vacation pay is another area new employers often misunderstand. Most provinces require a minimum of four percent vacation pay in the first years of employment. Some require six percent after a certain length of service. Vacation pay must accrue correctly and appear on every pay statement for the employees information.
Overtime rules depend on the province and on the type of employee. In many provinces, overtime starts after eight hours in a day or forty-four in a week. Salaried employees aren’t automatically exempt. Plenty of employers learn this the hard way. Overtime rules also extend to the type of profession the employee is in.
The safest approach is to check your provincial employment standards guide and build your payroll process around those rules.
Record Keeping and Documentation
Accurate payroll records are non-negotiable. CRA requires you to keep them for at least six years. Employment standards offices have their own requirements for hours worked, vacation taken, pay rates, and deductions.
You need records of:
- hours worked
- wages paid
- deductions
- vacation accrued and used
- pay stubs issued
- remittances sent
- ROEs and T4s
Digital records are fine as long as they’re clear, accessible, and secure. What this really means is that your payroll system should double as your record-keeping system. It saves you from scrambling through spreadsheets later.
Forms You Must File as an Employer
There are a few forms employees must file after running payroll. These forms are trigger after certain actions or during a certain point in time.
For example, at the end of the year a T4 must be issued to each employee and file the T4 Summary with the CRA. This reports total earnings and total deductions. The report you file must match the deductions and payouts to the employees during the year. If your records are sloppy throughout the year, this step becomes a nightmare.
Another example is for a pause in work. If an employee quits, gets laid off, or stops working for an extended period of time, you must issue a Record of Employment. This form is crucial for EI claims, and the government watches it closely. Any error can slow down the employee’s benefits and create headaches for you and the employee.
Depending on your province, you may also have year-end worker’s compensation filings or employer health tax filings. Keep track of these dates because they don’t always line up with CRA deadlines.
Payroll for Different Types of Employees
Not every employee fits in the same payroll box. Commission-based employees have fluctuating income, which makes source deductions inconsistent. Seasonal workers may start and stop multiple times a year, which affects EI. Students might not owe CPP. Youth employees sometimes fall under special rules depending on the province.
Treat each scenario individually. When in doubt, check CRA’s guidelines or ask your payroll provider. The cost of doing it right is always lower than the cost of correcting it later.
Common Payroll Mistakes New Employers Make
Every new employer makes mistakes. The goal is to avoid the most expensive ones.
Under-deducting taxes is a big one. This might occur if the wrong tax rate is used in the payroll tax deduction calculation.
Forgetting CPP or EI when an employee has crossed an income threshold is another one. This can lead to a huge tax bill at the end of the year to pay. deadlines can snowball into penalties.
A less common mistake is misclassifying workers. This can sometimes lead to audits depending on how niche your business is.
Vacation pay can be frequently miscalculated which may be an annoyance to employees. This can also affect the taxes calculated for the employees pay.
And one of the biggest issues is failing to keep adequate records of hours, especially for employees who work variable schedules. Ultimately, this is now employees get paid and miscalculation of this can cause a collapse in the payroll process.
If you want to stay out of trouble, build habits that prevent these mistakes before they happen.
Practical Tips for Stress-Free Payroll
Payroll does not have to be complicated. Running a stress-free payroll requires planning and understanding of your business schedule and needs.
Stress-free payroll starts by choosing a payroll system and sticking to it. Most softwares out there are automated and will handle most of the hard work related to payroll for you. You just have to focus on the paywork and admin tasks related to payroll.
It is important to also put remittance deadlines in your calendar so you never miss a payroll deadline. Review your payroll deductions quarterly to make sure nothing has drifted. Use direct deposit to avoid manual errors. Keep CRA letters and notices in one place. And if payroll ever starts taking more time than it should, that’s your sign to get help.
Conclusion
Hiring your first employee is a milestone worth celebrating. It means your business is growing, and you’re ready to share the workload. Payroll might feel complicated at first, but once you understand the moving parts and set up a system that supports you, it becomes routine.
What matters most is accuracy and consistency. Handle payroll properly, and you protect your employee, your business, and your peace of mind. And once the foundation is in place, hiring your second or third employee becomes far easier than the first.
You’re building something. Payroll is simply part of that growth.