Common payroll mistakes in Canada and how to avoid them

Let’s be real—payroll isn’t the flashiest part of running a business, but it’s the heartbeat of your operations. When it runs smoothly, your employees are happy and your operations are seamless. But when mistakes happen, they can cause major headaches, from damaging employee trust to attracting unwanted attention from the Canada Revenue Agency (CRA).

If you’ve ever second-guessed a deduction or scrambled to clean up a payroll mess, you’re definitely not alone. We’re here to call out the most common payroll trip-ups for Canadian businesses and, better yet, give you straight-talking tips to dodge them altogether. Stick with us and you’ll be running payroll like a hero in no time.

But first, let’s take a step back and look at why payroll mistakes are such a huge deal and what’s at stake for employers: 

Why payroll mistakes are a big deal for Canadian businesses

Getting payroll right isn’t just a box to tick—it’s the backbone that keeps your business and your people moving forward. When your team gets paid right and on time, everyone feels valued. But get it wrong, and the ripple effect is real. Suddenly your staff are left stressed, trust takes a hit and your credibility as an employer is on the line.

For Canadian SMBs, the stakes are even higher. One slip-up can mean hefty CRA penalties, interest charges piling up and way too much time spent correcting mistakes instead of focusing on your big priorities. It’s more than compliance—it’s about protecting your team, your reputation and your peace of mind. Mastering payroll is how you set everyone up to succeed. This is why a solid understanding of payroll rules is so crucial.

The role of CRA and provincial regulations in payroll compliance

Navigating payroll in Canada means juggling both federal and provincial rules. At the federal level, the CRA requires employers to withhold and remit Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums and income tax. These aren’t suggestions; they are legal obligations.

But it doesn’t stop there. Each province and territory has its own employment standards that dictate minimum wage, overtime calculations, vacation pay and statutory holidays. What works in Alberta may not apply in Ontario or Québec. For SMBs operating in multiple provinces, this complexity multiplies, making it very easy to make a mistake. Staying on top of these layered requirements is a major challenge, but it’s fundamental to avoiding compliance issues.

Now, let’s dive right into some of the most common payroll mistakes that businesses make: 

The most common payroll mistakes Canadian employers make

It’s easy to feel overwhelmed by payroll — you’re not alone if you’ve run into bumps along the way. Maybe you’ve misclassified a worker or missed a deadline, or you’ve realized just how fast rules can change. Every employer makes mistakes at some point. The good news? Once you know the common pitfalls, you can spot them early and avoid unnecessary stress down the line. Let’s walk through these together so you can keep your payroll on track.

Misclassifying employees and contractors

One of the most frequent and costly mistakes is misclassifying a worker. The line between an employee and an independent contractor can seem blurry, but the CRA has clear definitions. An employee works for you, while a contractor works for themselves and provides a service to your business. This distinction determines your obligations for CPP, EI and income tax deductions.

Getting it wrong can lead to back payments for taxes, penalties and interest. To avoid this, always review the nature of the working relationship. Does the worker use their own tools? Do they set their own hours? Can they work for others? If you’re unsure, the CRA’s guide on determining worker status is a helpful resource.

Missing payroll deadlines or late remittances

The CRA sets strict deadlines for remitting the source deductions you’ve withheld from employee pay. Missing these deadlines isn’t an option. Late remittances result in penalties — 10% for the first failure and up to 20% for repeat offences — plus daily compound interest on any outstanding amounts. 

For example – employers need to distribute T4 slips to employees and submit them to the CRA by the last day of February. The deadline for issuing a Record of Employment (ROE) is within 5 calendar days of interruption of earnings (if you issue ROEs on paper) or within 5 calendar days after the end of the pay period (if you issue ROEs electronically). 

These penalties for missing these important dates can add up quickly. The best way to stay on track is to create a clear payroll schedule and stick to it. Automating your payroll with reliable software is an even better solution, as it can manage remittances for you, helping you stick to timelines. 

Also, don’t forget that the CRA also re-assesses business’ remittance schedules every year and so you need to stay on top of your remittance frequency each year and update your payroll provider to avoid missing any deadlines. 

Running a business is stressful, but payroll doesn’t have to be. Employment Hero Payroll takes the administrative burden and stress out of accurate payroll management. With automated payroll calculations that free your team from tedious paperwork, Employment Hero gives you the time back to focus on growing your business while we’ve got payday sorted! 

Automate payroll with Employment Hero and get the peace of mind of never missing another CRA deadline. 

Incorrect tax withholdings or benefit deductions

Calculating income tax, CPP and EI can be complex. Using outdated tax tables, failing to account for provincial differences or making simple data entry errors can lead to under- or over-withholding. These mistakes cause problems for both you and your employees at tax time.

Employees might end up with an unexpected tax bill, while your business could face adjustments and penalties from the CRA. Double-check that you’re using the latest federal and provincial tax rates, and ensure all benefit deductions are calculated correctly.

Incorrect payroll set up

Often, the biggest mistakes happen before you even run your first pay cycle. A messy or incorrect initial setup creates a ripple effect of errors that keeps on giving, quarter after quarter.

So, what does a bad setup look like?

• Missing or incomplete employee documents: Failing to collect a completed federal and provincial TD1 form from a new hire is a huge one. Without these, you don’t have the correct personal tax credit information, leading to wildly inaccurate income tax withholding. This leaves your employees with a nasty surprise come tax time.
• Incorrect income and deduction codes: Payroll requires you to correctly map every type of pay (e.g., commissions, bonuses, taxable benefits) to the right CRA and provincial codes. If you incorrectly code a taxable benefit as non-taxable, or if you misapply a deduction, your year-end T4s will be dead wrong. You’ll end up under-remitting to the CRA and scrambling to fix dozens of employee tax slips later.
• Wrong remitter type: The CRA assigns you a remitter type (e.g., quarterly, monthly, or accelerated) based on your average monthly withholding amount. If you don’t confirm this or use the wrong schedule, your remittances will be late, triggering penalties and interest before you’ve even gotten started.
• Inaccurate provincial link: Your system needs to know the correct province of employment for every worker to apply the right provincial tax rates, minimum wage laws, and employment standards. Getting this wrong means non-compliance with local laws, especially concerning things like vacation pay and statutory holidays.

We’re here to help you get the inputs right. If you want a smooth, accurate payroll process, you need to ensure all initial data—from personal tax forms to your CRA remitter type—is correctly loaded. Trying to fix six months of compounded errors is always harder than spending an hour getting the setup right today.

When you partner with Employment Hero, we ensure that your set up is flawless, so you not only run payroll within minutes but also with complete confidence that you are ahead of all compliance regulations. 

Failing to keep accurate payroll records

Both the CRA and provincial Employment Standards Acts require you to keep detailed payroll records for several years — typically six or seven. These records must include hours worked, pay rates, deductions, vacation time and more. Without accurate, accessible records, you have no way to prove compliance during an audit.

Think about it: when would you need this historical data?

• If the CRA conducts an audit, they may ask for payroll records from three to six years ago to verify your remittances.
• If a former employee files a complaint with the Provincial Employment Standards department claiming they were underpaid for overtime two years ago.
• If an employee asks for a detailed breakdown of their vacation accrual from the last three years after returning from an extended leave.
• When a payroll officer needs to verify an employee’s CPP or EI contributions from a previous year to correct a T4 error.

Paper-based systems or messy spreadsheets are a recipe for disaster. Important documents get lost and data becomes inconsistent. Using a digital system to maintain organized records is essential for keeping your information secure, accurate and ready for inspection.

Overlooking overtime or holiday pay

Provincial employment standards govern overtime, statutory holidays and vacation pay, and the rules vary significantly. For example, Ontario’s overtime threshold differs from British Columbia’s, while Québec has its own unique set of public holiday rules.

For instance, statutory holiday pay rules differ significantly between:

• Ontario (where public holiday pay is often an average of the employee’s wages over the four work weeks before the holiday).
• British Columbia (where it’s an average day’s pay over a 30-day period).
• Québec (where it’s generally based on a simple one-twentieth of the wages earned in the four weeks preceding the week of the holiday).

Incorrectly calculating these entitlements is a common error that leads to underpaying employees and violating employment law. It’s vital to understand the specific rules for every province where you operate. 

Ignoring updates to employment laws or tax changes

Legislation is not static. Tax tables change, minimum wages increase and employment standards evolve. Failing to stay informed about these updates means your payroll can quickly become non-compliant. A calculation that was correct last year might be wrong today.

Proactively staying current is key. This means regularly reviewing CRA announcements and provincial labour ministry websites. A great way to manage this is to schedule periodic payroll reviews or partner with a payroll provider that automatically incorporates these changes into its system. But, even though your payroll provider is on top of these changes, you must be aware of them as well, so make it a point to closely follow any legislation or regulatory updates with regards to payroll. 

Before you know it, a small oversight can become a big deal — but it doesn’t have to be that way. By learning from these common mistakes, you can shift from crisis control to building a payroll system that supports your business and your people from day one.

Now that we’ve pulled back the curtain on the most common payroll blunders Canadian SMBs are making, the real win is figuring out how to shut them down for good.

This isn’t about just fixing a mistake; it’s about empowering you to build a system where those errors just don’t happen. You’re a Hero for creating jobs; let’s make sure the administrative grind doesn’t take you down.

Ready to see how to be the creator of a smoother, more compliant payroll process? Let’s flip the script and show you the smarter way.

How to prevent payroll errors in your business

It’s time to stop playing whack-a-mole with payroll mistakes. If you want to get ahead of costly errors, the real game-changer is being proactive, not reactive. You don’t have to do it alone, either. With the right mix of smart tools and an informed team, you can spot issues before they snowball. Make payroll work for you — not the other way around.

Implement payroll automation and reliable software

Manual payroll is prone to human error. Digital payroll platforms are designed to prevent these mistakes. They automate calculations for taxes, deductions and benefits based on the latest CRA and provincial regulations. This reduces manual data entry and ensures accuracy.

Reliable software handles complex tasks like remittances, record-keeping and generating pay slips, freeing up your time to focus on your business. By letting technology manage the details, you build a payroll system that is efficient, compliant and scalable.

Employment Hero Payroll is designed for Canadian businesses to be intuitive, reliable and stress-free. Manage payroll processes on your own terms, stay on top of compliance and automate payroll calculations – all within a single platform that gives you more control while reducing the burden of admin tasks. We truly believe that managing payroll shouldn’t be a pain. 

Ready to explore smarter payroll for your business? 

Conduct regular audits and reconciliations

Don’t wait for a letter from the CRA to find out something is wrong. Schedule regular payroll audits — monthly or quarterly — to catch discrepancies early. During an audit, you should reconcile your payroll register with your bank statements and CRA remittance reports.

Check that deductions for CPP, EI and taxes are correct. Verify vacation accruals and ensure overtime has been calculated properly. A consistent audit process is your best defence against compounding errors and gives you confidence that your payroll is accurate.

Train your payroll and HR staff

Your people are a critical part of your payroll process. Ensure that anyone responsible for payroll is trained on compliance updates, CRA changes and your internal policies. Ongoing education helps prevent repeat mistakes and builds a culture of accuracy.

Invest in professional development opportunities and make sure your team has access to reliable resources. A knowledgeable team, backed by powerful tools, is the foundation of a flawless payroll system.

What to do if you’ve made a payroll mistake

Even with the best systems, mistakes can happen. The key is to act quickly and transparently. Acknowledging an error and taking immediate steps to correct it shows integrity and helps you manage the situation effectively with both your employees and the CRA.

How to fix payroll errors with the CRA

If you’ve discovered a remittance error or need to correct information on a T4 slip, don’t panic. The CRA has established processes for making adjustments. You can amend a T4 slip by filing a T4 Amended form, and remittance errors can often be corrected through your CRA My Business Account.

For more complex issues, you may need to submit a formal request for an adjustment. Be prepared to provide supporting documentation. Acting promptly can help minimize penalties and interest.

Communicating payroll corrections to employees

When a payroll error affects an employee, clear and honest communication is essential. Inform them of the mistake as soon as you discover it. Explain what happened, how you are fixing it and when they can expect a corrected payment or pay slip.

Apologize for the inconvenience and reassure them that you have taken steps to prevent it from happening again. Transparency is the best way to rebuild trust and show your team you value them.

How Employment Hero helps Canadian businesses avoid payroll mistakes

You’re not alone in this. Employment Hero is here to make employment easier and more valuable and that starts with payroll you can count on. Our all-in-one platform is designed to help Canadian SMBs run payroll with confidence, stay on top of compliance and cut down processes to minutes, not days. 

Our cloud payroll software automates complex calculations, from tax withholdings to overtime, ensuring you stay compliant with CRA and provincial legislation. With real-time updates for regulation changes, you’ll never have to worry about using outdated information. Employment Hero integrates payroll with HR, creating a single source of truth for all your employee data. This eliminates manual entry errors and streamlines your entire process.

What’s more, with our Managed Payroll services, we run your payroll so you don’t have to.  From staying on top of tax reporting and record keeping without the paperwork pile-up to tracking employee hours with integrated time and attendance tools, we take care of it all, so you always feel confident that your payroll processing always meets compliance requirements. 

Ready to take the stress out of payroll?