Canadian payroll guide: How employers can get payroll right

Running a compliant and accurate payroll system is a core responsibility for all Canadian employers. This comprehensive guide breaks down the essential steps, calculations and compliance requirements to ensure your business processes employee compensation accurately every time. 

What is in this payroll guide?

This guide serves as your central resource for navigating the complexities of Canadian payroll, a process governed by both federal and provincial laws. We’ll cover everything you need to know, from initial payroll setup and mandatory deductions to complex calculations, compliance deadlines and choosing the best payroll management solution for your business.

Payroll calculation methods

The method for calculating an employee’s gross pay depends entirely on their compensation structure—hourly, salaried or variable pay—and is the starting point for all deductions.

Gross pay calculations for hourly employees

Calculating pay for hourly employees requires meticulous tracking of regular hours, overtime and any special premiums to determine the total gross earnings for a pay period. Accurate time tracking is paramount for compliance, as pay must meet the provincial or territorial minimum wage for all hours worked.

Salary-based employee payment structures

For salaried employees, pay is typically a fixed amount per pay period, regardless of the hours worked, but employers must still ensure that the employee’s compensation, when divided by hours worked, does not fall below the required minimum wage for their jurisdiction. While salaried employees are often exempt from standard daily overtime rules, employers must check provincial employment standards to confirm if the employee’s role qualifies for an exemption.

Overtime pay requirements and calculations

Overtime rules are a patchwork of provincial and territorial regulations, making them one of the most critical and complex aspects of compliance. In Canada, the standard overtime rate is typically 1.5 times the employee’s regular rate of pay, but the threshold for when overtime kicks in varies significantly.

Jurisdiction	Overtime threshold (Time-and-a-half)	Notes on calculations
Federal	After 8 hours a day or 40 hours a week	Overtime is payable on the hours exceeding either the daily or weekly limit
Ontario	After 44 hours a week	Generally calculated on a weekly basis
Quebec	After 40 hours a week	Generally calculated on a weekly basis
Alberta	After 8 hours a day or 44 hours a week	Overtime is payable on the hours exceeding either the daily or weekly limit
British Columbia	After 8 hours a day or 40 hours a week	Overtime is payable on the hours exceeding either the daily or weekly limit. Double-time applies after 12 hours in a day
Manitoba	After 8 hours a day or 40 hours a week	Overtime is payable on the hours exceeding either the daily or weekly limit
New Brunswick	After 44 hours a week	Rate is 1.5 times the minimum wage, not 1.5 times the regular wage
Newfoundland & Labrador	After 40 hours a week	Rate is 1.5 times the minimum wage, not 1.5 times the regular wage
Northwest Territories (NWT)	After 8 hours a day or 40 hours a week	Overtime is payable on the hours exceeding either the daily or weekly limit
Nova Scotia	After 48 hours a week	Generally calculated on a weekly basis
Nunavut	After 8 hours a day or 40 hours a week	Overtime is payable on the hours exceeding either the daily or weekly limit
Prince Edward Island (PEI)	After 48 hours a week	Generally calculated on a weekly basis
Saskatchewan	After 40 hours a week	Daily overtime applies after 8 or 10 hours, depending on the compressed workweek schedule
Yukon	After 8 hours a day or 40 hours a week	Overtime is payable on the hours exceeding either the daily or weekly limit

Commission and bonus payment processing

Commissions, incentives and bonuses are considered forms of taxable remuneration and must be included in an employee’s income. These variable payments are subject to the same statutory deductions (CPP, EI and income tax) as regular wages and their payment should be processed according to rules set by the Canada Revenue Agency (CRA).

Key components of salary framework

An employee’s take-home pay is determined by a series of mandatory calculations that start with gross income and apply various statutory and non-statutory deductions.

Gross income determination

The gross income is the total amount an employee earns before any deductions are taken, comprising their base wages (hourly or salary), overtime, commissions, bonuses, allowances and the value of any taxable benefits. This total is the base for calculating all mandatory withholdings.

CPP contribution requirements

The Canada Pension Plan (CPP) is a mandatory retirement savings plan for most working Canadians outside of Quebec (who contribute to the QPP). Employers must deduct the employee’s portion of the CPP contribution and remit a matching employer portion. For 2025, the employee and employer contribution rate is 5.95% on earnings between the basic exemption of $3,500 and the Year’s Maximum Pensionable Earnings (YMPE) of $71,300.  There is also a second tier of contributions on earnings up to the Year’s Additional Maximum Pensionable Earnings (YAMPE) of $73,200.

Employment Insurance deductions

Employment Insurance (EI) provides temporary income support to workers who are temporarily unemployed or on leave (e.g., maternity, parental or sickness). Employees pay an EI premium and the employer must contribute 1.4 times the employee’s amount. In 2025, the employee premium rate is 1.64 per $100 of insurable earnings (up to a maximum insurable earnings of $65,700).

Mandatory tax withholdings

Employers act as collection agents for the government and must deduct three main statutory amounts from an employee’s gross pay: Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums and federal and provincial income tax. These amounts must be held in trust and remitted to the CRA according to a set schedule

Provincial tax variations

While federal income tax and EI are standardized across most of the country, Quebec is the major exception. In Quebec, employers must remit provincial income tax to Revenu Québec (RQ) instead of the CRA and the province has its own social security system, requiring employers to manage the Québec Pension Plan (QPP) and the Québec Parental Insurance Plan (QPIP). Additionally, Quebec employers pay contributions to the Health Services Fund (HSF) and the Commission des normes, de l’équité, de la santé et de la sécurité du travail (CNESST) (Workers’ Comp). 

Workers’ compensation requirements

Workers’ compensation is a mandatory, employer-funded insurance program administered by provincial and territorial Workers’ Compensation Boards (WCBs), such as the Workplace Safety and Insurance Board (WSIB) in Ontario. Employers must register with the appropriate board, report their annual payroll and pay premiums based on their industry’s assessment rate and the maximum assessable earnings for the year in their jurisdiction.

Running payroll in Canada involves navigating a complex landscape of federal and thirteen different provincial and territorial regulations. Trying to piece this information together one Google search at a time is slow, stressful and exposes your business to unnecessary risk.

Stop guessing and start running payroll with absolute confidence. Find this information helpful? Download our free guide and learn everything you need to know about running payroll in Canada at your own pace. 

Establishing payroll systems

Before processing their first paycheque, employers must complete essential registration and information collection steps to ensure legal compliance with federal and provincial authorities.

Business registration requirements

Any individual or entity that pays salaries, wages, tips, bonuses or provides taxable benefits to employees must register for a payroll program account with the Canada Revenue Agency (CRA). This is a legal requirement before the first remittance due date.

CRA account setup and business numbers

A payroll account is linked to your Business Number (BN), a nine-digit identifier used for dealing with federal government programs like the CRA. If you already have a BN, you simply need to contact the CRA to add the payroll program account. If you’re a new business, you can register for your BN and select the payroll account service simultaneously through the CRA’s Business Registration Online.

Employee information collection

Collecting accurate employee data is a non-negotiable step for correct payroll processing and remittance. Key information includes the employee’s Social Insurance Number (SIN), a completed federal Form TD1 (Personal Tax Credits Return) and the corresponding provincial or territorial TD1 form to determine the correct amount of income tax to deduct.

Banking and direct deposit configuration

To ensure timely and secure payments, most Canadian employers offer direct deposit or Pre-Authorized Debit (PAD). This requires configuring your payroll system with the employee’s bank information and ensuring your company’s bank account is set up for automated payroll transactions, often requiring an agreement with your bank or payroll provider.

Payroll software selection and implementation

The right payroll system simplifies compliance and reduces the risk of error. Options range from basic payroll software that automates calculations and remittances to full managed payroll services where a third-party provider handles the entire process. Automated solutions ensure legislative compliance is maintained with real-time updates to tax, CPP and EI rates.

Payroll processing procedures step by step

Processing payroll involves a cyclical, multi-step workflow that must be consistent for every pay run to ensure accuracy and meet compliance deadlines.

1. Calculate gross pay: Tally employee hours (for hourly workers) and add any bonuses, commissions, taxable benefits and allowances.
2. Calculate deductions: Determine the mandatory withholdings for CPP/QPP and EI/QPIP and federal/provincial income tax
3. Calculate voluntary deductions: Charitable contributions are deducted after CPP, EI, federal and provincial taxes. 
4. Calculate net pay: Subtract total deductions from gross pay to arrive at the employee’s final take-home pay.
5. Pay employees: Issue payment via direct deposit or cheque on the scheduled payday.
6. Remit deductions: Within the CRA’s specified time frame (which depends on your average monthly withholding amount), remit the collected employee deductions and your matching employer contributions (CPP/QPP and EI/QPIP) to the CRA and/or Revenu Québec.
7. Provide pay stubs: Issue a detailed statement of earnings and deductions to the employee on or before the pay period.

As a small business owner, managing payroll processing can be a lot. Employment Hero Payroll Software streamlines your payroll process so you can focus on what you do best. From integrating with your HR tools and staying on top of compliance to managing manual data entry and providing expert support, we’ve got it all covered, so you can grow your business. 

Employee payment schedules

Establishing a payroll cycle is an important early decision that impacts cash flow, administrative overhead and employee satisfaction.

The most common payroll schedules in Canada are bi-weekly (26 pay periods per year), semi-monthly (24 pay periods per year) and monthly (12 pay periods per year). Bi-weekly is popular in professional settings for its consistent timing, while semi-monthly can align well with month-end accounting. Provincial employment standards legislation dictates the minimum frequency for paying employees, so employers must adhere to the rules of the province where the employee is based.

Download the complete Canadian Payroll Guide now and get all the crucial information—from mandatory CPP/EI calculations and the differences in provincial overtime laws to CRA remittance schedules and year-end T4 filing—all in one definitive, easy-to-reference document.

Take control of your payroll compliance, reduce the risk of costly errors, and ensure you are paying your employees correctly, every time, at your own pace.

Payroll tax compliance

Compliance is the heart of payroll management, ensuring that all deducted funds are remitted correctly and all reporting requirements are met with the CRA.

Federal and provincial obligations require employers to remit (pay) the employee deductions and their matching contributions on a regular schedule determined by the CRA, based on the employer’s Average Monthly Withholding Amount (AMWA) from two years prior. 

The most crucial annual filing requirement is the distribution and filing of T4 (Statement of Remuneration Paid) and T4A (Statement of Pension, Retirement, Annuity and Other Income) information returns. Employers must file these slips with the CRA and distribute copies to employees by the last day of February following the calendar year.

Employee benefits and payroll integration

Employer-provided benefits must be assessed to determine if they are taxable, which means their value must be included in the employee’s income for payroll deduction purposes.

A benefit is generally taxable if the employee is the primary beneficiary. Examples include the personal use of a company vehicle, gift cards or transit passes. Non-taxable benefits often include employer-paid contributions to private health and dental plans, as well as mileage allowances paid at a reasonable, CRA-prescribed rate for business travel. If a benefit is taxable, its calculated value must be added to the employee’s gross income before statutory deductions are calculated. For more information, refer to the CRA Taxable Benefit and Allowance guide. 

Payroll record keeping and documentation

Employers have a legal obligation to maintain meticulous and organized payroll records for a specific period to satisfy audits and provide proof of compliance.

The CRA requires employers to keep all source documents, records and accounting ledgers, typically for a period of six years from the end of the last tax year they relate to. This documentation includes time sheets, employment contracts, completed TD1 forms, general ledgers and copies of all pay stubs provided to employees. Employers are also responsible for generating and issuing a Record of Employment (ROE) document whenever an employee experiences an interruption of earnings, which is required for the employee to apply for EI benefits.

Payroll management solutions for businesses

Choosing the right system is a strategic decision that affects efficiency, cost and compliance risk.

The three primary models for payroll management are:

• In-house payroll: Managed entirely by internal staff (e.g., an accountant or payroll administrator). This provides maximum control but requires significant expertise and time investment.
• Payroll software: Digital platforms that automate calculations, deductions and remittances. This is cost-effective for small to mid-sized businesses but still requires the employer to input and verify data.
• Third-party payroll providers: Managed services that take over the entire payroll process, reducing the burden of compliance and administration on the employer.

Employment Hero Payroll Software does the heavy lifting so you don’t have to. From manual data entry to automating payroll processing to staying on top of compliance, we’ve got it all covered, taking all the stress out of payroll management. Combining an intuitive platform with expert support, you’ve got everything you need to make your payroll processes smarter and completely hassle-free.  

Year-end payroll processing

The close of the calendar year is a critical time for payroll, requiring special attention to final reports, income reconciliation and statutory filings.

Key year-end tasks include: preparing and filing T4 and T4A slips, ensuring all vacation pay liability is correctly reconciled, processing final bonus payments and generating all necessary Records of Employment (ROEs) for departing staff. Accurate year-end processing ensures that employees receive the correct documentation for their personal income tax returns.

Employee benefits and contract termination policies

The manner in which an employee’s final pay is handled is governed by provincial employment standards, making it one of the highest-risk areas for non-compliance.

The final pay must include all outstanding wages, accrued vacation pay and any applicable severance pay or termination pay as defined by the employee’s contract and provincial labour laws. All regular statutory deductions must still be applied to these final amounts. The employer must also issue the Record of Employment (ROE) promptly so the former employee can access Employment Insurance (EI) benefits.

Payroll error management and corrections

Even with the best systems, payroll errors can occur. Employers must have clear procedures for correcting mistakes promptly to maintain compliance and avoid penalties.

If an error is discovered in a previous pay period, the employer must correct the payment and adjust the deductions in the next pay run. If the error affects a remittance that has already been made to the CRA, the employer must submit a request to amend their payroll information and may need to file an amended T4 slip later in the year. Open communication with the employee about the correction is also essential.

Multi-provincial payroll management

Hiring employees who reside and work in different provinces introduces significant complexity, as payroll must comply with the rules of the employee’s province of employment.

This means employers must understand and apply the correct provincial income tax rates, provincial non-refundable tax credit amounts, provincial-specific employer taxes (e.g., EHT in Ontario or the HSF in Quebec) and the varying provincial labour laws for overtime, vacation and minimum wage. Accurate multi-provincial payroll management often requires a sophisticated payroll software solution or a dedicated third-party provider.

Payroll technology and automation

Modern payroll management is increasingly reliant on technology to enhance efficiency, reduce manual errors and ensure up-to-the-minute compliance. Cloud-based payroll solutions offer secure, anywhere-access management, while features like mobile apps allow employees to access their pay stubs and manage time-off requests easily. The incorporation of AI and machine learning is also starting to automate complex payroll tasks, such as compliance audits and forecasting.

Employment Hero Payroll software offers a smarter way for you to manage payroll. From automatic payroll calculations to reporting and insights to staying on top of Canadian regulations, we do the heavy lifting for you so you can focus on more strategic tasks. 

Book a demo with Employment Hero to streamline payroll management and build intuitive, reliable and stress-free processes that anyone can master. 

Payroll management services

For businesses lacking in-house payroll expertise, outsourcing the function to a payroll management service is a highly effective strategy. These services can range from simple software provision to fully managed payroll, where the provider handles all calculations, remittances and year-end reporting. This reduces administrative overhead and shifts the burden of compliance to an experienced provider.

Employment Hero’s Managed Payroll services take running payroll, managing compliance and tax reporting off your plate. From guaranteed data entry to timely reporting and year-end reconciliation, we manage end-to-end payroll processing so you don’t have to. 

Global payroll solutions through Employer of Record

When a foreign company hires Canadian workers without establishing a registered entity in Canada, an Employer of Record (EOR) provides a compliant solution. The EOR acts as the legal employer, managing all payroll, tax withholding, statutory remittances and employment compliance on the foreign company’s behalf, allowing the business to hire Canadian talent quickly and legally.

Payroll compliance penalties in Canada 

Non-compliance with CRA payroll obligations can result in serious financial penalties, making accurate and timely remittance a top business priority.

The CRA imposes penalties and charges interest for late or insufficient remittances of payroll deductions. Penalties can be assessed for failure to deduct or failure to remit, with severity increasing based on the history of non-compliance. Penalties for failure to deduct are 10% of the amount not withheld, while penalties for repeated failure to deduct can be as high as 20%. Penalties also apply to late or incorrect filing of T4 slips.

Vacation pay and holiday pay rules 

Vacation and holiday pay are frequently confused by employers, yet both are separate entitlements governed by provincial or territorial employment standards. 

Vacation pay is typically a percentage of an employee’s gross pay (e.g., 4% for two weeks’ vacation) and must be paid out or accrued as required by the jurisdiction. 

Statutory holiday pay (general holiday pay) requires an employee to be paid for a public holiday, often based on an average day’s pay, even if they don’t work. The specific holidays and calculation methods vary by province.

How remote and hybrid work affects payroll 

The rise of remote work has blurred geographic lines which adds to the complexity of payroll, requiring employers to determine province of employment and where work is performed to determine:

1. Permanent or deemed establishment

2. Source deductions

3. Employer payroll taxes, 

4. Employment standards

5. Workers compensation.

An employee’s tax obligations are based on the province of employment, which is generally where they physically report for work or if they are remote, the province where they are paid from.  If the head office is Ontario, the employee is taxed in Ontario and those earnings are subject to EHT. 

Where the work is performed (for a remote employee this is where they reside) determines labour laws and Workers Compensation. This can trigger new provincial registration requirements in a new jurisdiction for the employer, requiring careful consultation before finalizing a remote hiring arrangement.

Ready to run your Canadian payroll with total accuracy and ease? Master the essential requirements—from mandatory CPP/EI and T4 reporting to complex provincial overtime and benefit rules—all in one place. Employment Hero’s comprehensive guide empowers you with structured, reliable information. Download it now to streamline your process, minimize errors and ensure timely compliance, all on your own schedule.

Payroll in Canada made easier 

Navigating payroll in Canada can feel complex, but it doesn’t have to be. With the right tools and understanding of your obligations, you can pay your team accurately, meet CRA requirements and focus on growing your business. Employment Hero helps you manage every part of payroll — from deductions and remittances to year-end reporting — all in one simple platform.

Ready to make payroll effortless? Learn more about how Employment Hero can support your Canadian team.