How To Handle Payroll For Small Business In Canada In 2024 – Step By Step Guide

Written by Jonathan

Jan 9, 2024 Under 3min read


Entrepreneurs have a lot of work to do during tax time. Organizing invoices, collecting expense receipts, determining money owed — the list goes on. If you’re a newer company, you might also wonder how to handle payroll for small business in Canada.

It’s hard to quickly figure out how small business payroll works: online information is dense and hard to sift through, leaving you with so many questions. And the rules can differ by province, so you have to make sure you are following the rules for your province. All that, on top of managing your regular business tasks and operations!

Here at Back Office Stars, we’re dedicated to helping Canada’s entrepreneurs get their books & systems optimized so that they can focus on growth. We also enjoy educating Canadian entrepreneurs and helping them navigate the complexities of running a small business in Canada. 

Endless instructions and considerations make payroll services in Canada a pain. That’s why we put together this guide on how to set up payroll for small business in Canada. By the end, you’ll be left with more clarity on the payroll process and a valuable resource to refer to whenever you’d like. 

Let’s start off by covering 4 common mistakes owners new to payroll make – so you can avoid them.

Common Payroll Mistakes To Avoid

The CRA regulations for payroll are complicated and make payroll difficult for the average Canadian business owner to manage. Some payroll mistakes you’ll find out about right away, like if you pay your staff late or the wrong amount. They will tell you quickly!

Other payroll mistakes might be hidden from you until your year-end or until the CRA contacts you, and by then, you may owe a lot of money, especially if you have messed up payroll deductions. But having a solid bookkeeper and robust payroll software makes things easier. 

Here are some common payroll mistakes you want to avoid, along with our payroll advice for small businesses: 

1. Confusing Employees for Contractors and Forgetting Deductions like CPP and EI

Some businesses rely on freelancers and contractors in their early days to save on the costs of an employee. But once you make the switch to employees, you become responsible for much more, according to the CRA. 

A new responsibility is to deduct CPP and EI from every paycheque. And no — you can’t get out of deductions by pretending your employee is a contractor. (Learn about the difference here)

Pro tip: Talk to a payroll expert to figure out the difference between employees and contractors. 

2. Late Remittance

If you’re not one for deadlines, you need support from someone who is (ahem, Back Office Stars). 

The CRA has hefty penalties for late remittance that increase with every day you’re late. 

Check it out: 

  • 3% for three days late
  • 5% for 4-5 days late
  • 7% for 6-7 days late
  • 10% for more than a week late or if you don’t remit anything
  • 20% if you’re a double offender for two years or more or if the CRA can prove you were negligent

Pro tip: Refer to the CRA’s remittance due date page and make notes of due dates on your calendar. Set alarms if necessary. 

3. Not Maintaining Accurate Records

Did you know the CRA requires all businesses to keep seven years’ worth of records on payroll and employees? On top of that, individual provinces and territories may have their own requirements for recordkeeping that you’ll have to comply with. 

The cost of having absent or disorganized payroll records? Penalties and prosecution.

Pro tip: Talk to a bookkeeper about recordkeeping rules and review your records regularly (at least once a year).

4. Taxable Benefits

It’s easy to calculate gross wages if you just look at salaries and dividends. But what if you offer your employees additional benefits, like: 

  • Subsidized housing
  • Transportation
  • Gym memberships
  • Loans
  • Business expenses

Guess what?

This is all taxable income for your employees. The CRA will ding you with penalties if you don’t report it, in the case of an audit. 

Pro tip: Double check your calculations with reputable payroll software and consult a bookkeeper.

Now that we’ve got common mistakes to avoid out of the way, let’s go over important concepts related to the ways you can pay yourself and your team. 

  1. Paying yourself, your family and your shareholders – understanding salaries vs dividends and income splitting.
  2. Paying your staff – contractors vs employees.

Looking for a better bookkeeping and payroll experience?

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