Canadian Payroll Manual

Getting It Right for Small Business

Applies To Contract Of Service Relationships | Employer - Employee Status

WHAT'S IN THIS ARTICLE
Introduction | Purpose of Manual | How to Use This Manual | Quick Start Guide | Manual - Table of Contents | Where Do I Start? | What to Pay? | Different Ways to Pay People | Payroll Cycle Basics | Annual Filing Process | Record Keeping Requirements | Hiring and Managing Independent Contractors | A Special Category: The Incorporated Employee | Your Legal Requirements

Originally Published on Bookkeeping-Essentials.com in 2010 | Substantially Revised February 19, 2025

NEXT SECTION >> Hiring and Paying Your First Employee
JUMP TO >> Table of Contents

Innovation, Science and Economic Development Canada says, "Micro-businesses (1−4 employees) make up 55.3% of Canadian businesses. By adding those businesses with 5−9 employees, this number increases to 73.8%. In other words, almost three out of four Canadian businesses have 1−9 employees."*

I know firsthand how overwhelming payroll can be for small business owners. You're probably thinking, "All I really want is to make sure my employees are paid properly and keep the CRA happy. Nothing fancy - I just want to do it right!". I'm not a payroll expert, but I did learn a few things about basic Canadian payroll through experience before I retired.  

I have tried to break everything down into what I think are simple, manageable steps. So grab your favorite beverage (mine right now is just plain Santevia filtered water), find a quiet place to concentrate without distractions, and let's tackle this together. By the time you finish this manual, you'll have a plan for handling your small business payroll all through the year including year-end tax slips.

As you work through the manual, remember to take notes to tweak it to your business so you aren't always recreating the wheel every time you do a payroll run!

*Source: Key Small Business Statistics 2023

Canadian Payroll Manual

Purpose Of This Manual

This Canadian Payroll Manual focuses specifically on small businesses who manage payroll for less than 10 employees, making complex payroll concepts manageable for micro-business owners. My aim is to provide practical answers to four questions:

• What do you need to do?
• When do you need to do it?
• How do you do it correctly?
• Where do you find help if you need it?

In doing so, I am trying to emphasize the unique challenges and subtleties faced by small businesses like yours.

How To Use This Manual

The Canadian Payroll Manual is organized into five main sections, each tailored for micro-business owners:

1. Hiring and Paying Your First Employee - Start here if you're new to payroll. This section covers everything from worker classification to selecting the right payroll software.
2. Running Payroll (The Regular Cycle) - I'll cover the payroll cycle basics, its rhythm as well as examine taxable benefits, auto allowances and how to pay employees in cash.
3. Staying Compliant and Keeping the CRA Happy- Essential information for when you're dealing with regular payroll remittances to CRA, your annual tax filing obligations, record keeping requirements as well as some best practices tips and avoiding common mistakes.
4. Working With Non-Employees - There's a different process for independent contractors and incorporated employees. There is still stuff you need to do to stay onside with the CRA!
5. Reminders About Your Legal Obligations - Four things you need to keep on top of.

The Quick Start Guide below gets you going immediately. The detailed sections that follow provide a more in-depth perspective for when you need it. I've linked each section to various reference pages for when you need more details.

Quick Start Guide

A reminder that the Canadian Payroll Manual's Quick Start Guide is designed specifically for small business owners managing payroll for 1-9 employees.

For those times when you need information fast, this section of the Canadian Payroll Manual provides useful quick-reference tools, one of which is a flowchart. Refer back to it if you get lost about where you are in the process.

You'll find the Payroll Process Overview Flowchart below shows you the connections between the different forms and procedures, from hiring new employees to issuing T4s and completing year-end payroll tasks. This flowchart helps you see the forest for the trees.

Need to handle something specific right now? Here are some common tasks and where to find them:

Classifying workers correctly → Worker Classification
Register with CRA → Open a payroll account
Setting up a new employee → TD1 Forms and SIN Verification
Processing payroll → Steps for Hiring and Paying Your First Employee
Filing year-end tax forms → T4 and T4A Slips

Important Contact Information

CRA Business Enquiries: 1-800-959-5525
CRA Business Enquiries: 1-800-959-7775 (FR)
Service Canada (ROE help): 1-800-367-5693
[Your Province's] Workers' Compensation: [Insert number]
[Your Province's] Employment Standards: [Insert number]

Additional Reputable Resources

• Payroll
  canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll.html
• Publication T4001 Employers’ Guide – Payroll Deductions and Remittances 
  canada.ca/en/revenue-agency/services/forms-publications/publications/t4001/employers-guide-payroll-deductions-remittances.html
• Payroll Deductions Online Calculator
  canada.ca/en/revenue-agency/services/e-services/digital-services-businesses/payroll-deductions-online-calculator.html
• How to Complete the Record of Employment Form
  publications.gc.ca/collections/collection_2012/servicecanada/SG5-12-1-2011-eng.pdf
• First Reference free guides covering Canadian statutory holiday pay and vacation pay rules, essential HR policies, AI in the workplace, and more. First Reference helps Canadian businesses with HR compliance and policy management.
  firstreference.com/resources/guides/ 

Canadian Payroll Manual

Where Would You Like To Start?

Let's get those payroll ducks in a row! Whether you're just starting out or looking to improve your process, this manual will help you develop a payroll routine and answer many of your questions along the way. You've got 5 choices. Which one do you want?

Let's Take A Closer Look at Each Section

Section TOC

• Help! I'm New to Payroll - Where Do I Start?
• The Basics on Different Ways to Pay People

Specific Topics (links to separate pages)

• Is Your Worker an Employee or Contractor?
• Step-By-Step Setup and Hiring Instructions
• Getting It in Writing: Employee Agreements
• 2024 Province of Employment Rules for Remote Workers

This section of the Canadian Payroll Manual addresses common payroll challenges faced by micro-businesses hiring their first employee.

Canadian Payroll Manual

What To Do If You Are New To Payroll Administration
(Help! I'm New To Payroll - Where Do I Start?)

Before you jumping in on the instructions in this Payroll Tax Guide, it would be wise to educate yourself about your payroll compliance responsibilities. A good place to start are the CRA webcasts.

It's important these days to ensure you are getting your information from a reliable source. For that reason, I recommend using the Canada Revenue Agency's website as the final determinant. Over the years, CRA has published many informative webcasts located in the video gallery under videos for businesses.

If you are a new business owner with payroll, take time to watch the Canada Revenue Agency (CRA) 2024 28 minute webcast Payroll Responsibilities for Employers.  I would review this BEFORE you bring your first employee on board. It covers responsibilities as an employer and the consequences of non-compliance (what happens if you don't follow the rules). Here is the general outline of what you'll learn.

• Payroll obligations to CRA
• Deductions and contributions
• Tools for calculating types of pay and withholdings
• Books and Records
• Remitting
• Reporting

Before you can start running payroll, you'll need to handle some paperwork basics. This includes getting your Business Number (BN) and setting up a payroll account with CRA.

Here's some good news. If you already have a GST/HST account (RT) - you've got your BN! You just need to add your payroll program account (RP). I talk about this in step 2 of hiring your first employee instructions.

__________

Sidenote: I'm disappointed that the CRA took down their 2019 webcast 'Payroll 101 - What you need to do if you're new to payroll administration'. It was a great resource for new employers, and I wish they had updated it after the CPP2 changes occurred in 2024 instead of removing it entirely.

__________

🦆 Duck Tip: If you're like me and prefer reading over watching videos, you'll be happy to know that every CRA webcast comes with a written transcript. It's a lot faster than sitting through the webcast!

In summary, the CRA's videos for business gallery is a good reliable source to learn about your compliance responsibilities around payroll tax deductions. Although, fair warning, they are usually a bit dry as the presenters usually read from a script I'm guessing to ensure the information is accurate.

Canadian Payroll Manual

Understanding Worker Relationships
(The Basics on Different Ways to Pay People)

Before you write that first cheque or make that first direct deposit or e-Transfer, let's talk about worker relationships. Getting this wrong can cost you thousands in reassessments and penalties, so it's worth taking a few minutes to understand the basics.

Canadian payroll tax is a complex compliance obligation for many reasons. This payroll manual lays out some your responsibilities. You don't want to screw this up.

As a small business owner, this needs to be on your radar. You need to make this an important priority in your long list of things you need to get done in a day, a week, a month. I encourage you to be kind to yourself. It'll be easier on your if you get it right from the start.

There are three types of worker relationships. How to proceed depends which type of contract you are entering into.

1. An employer-employee relationship is a contract of service;
2. An independent contractor relationship is a contract for services.
3. A personal services business (PSB) relationship which has its own special category called incorporated employee.

Think of it this way:

1. Employee: An office manager who works set hours under your direction.
2. Contractor: Your web designer who works for multiple clients.
3. PSB: Your bookkeeper who only works for you but through their corporation.

The relationship type affects how much you pay in CPP, EI, and other deductions. For employees, you're responsible for both portions of CPP and EI. For contractors and PSBs, they handle their own deductions. 

Learn More >> How CRA determines worker status

Learn More >> Why worker classification matters

A Note About PSBs:
CRA has a process to determine the employment status of an employee in their eyes. Sometimes a small business owner wants an incorporated employee relationship to avoid costly payroll taxes and clearly define the intent of their working relationship as not that of employer-employee.

This relationship is sometimes referred to as a disguised employee and may have negative tax effects for the incorporated employee and potential risk for the payer - the business hiring the incorporated employee.

An example:

Let's say Laura is a certified professional bookkeeper who works only for your company, but she's incorporated as 'Laura's Bookkeeping Solutions Inc.' You agreed to this relationship because, hey, no payroll deductions! BUT (and this is a big but) if CRA determines Laura is actually an employee disguised as a corporation, you could be on the hook for all those payroll deductions retroactively.

Laura might look like a contractor, but CRA might view her as a PSB if:

• She works only for you
• She uses your equipment
• She follows your schedule
• You control how she does her work

The PSB rules were actually created to prevent people from avoiding taxes by incorporating when they're really employees. As mentioned, this type of working relationship is what CRA calls 'incorporated employees'.

Learn More >> Should You Hire a Personal Services Business?

Still not sure? Keep reading below for a bit more information about personal services businesses.

Section TOC

• Payroll Cycle Basics
• Your Payroll Rhythm
• Payroll Processing Methods
• A Short Word About Data Security
• Setting Yourself Up for Success
• Your Pay Run Checklist
• Top 5 Common Payroll Calculation Mistakes
• Building Good Habits

    Specific Topics (links to separate pages)

• When to Tax Employee Perks and Benefits
• Vehicle Allowances & Reimbursements
• Paying Casual Labour in Cash The Right Way

The next section of this Canadian Payroll Manual addresses common payroll challenges faced by micro-businesses learning how to run payroll for the first time.

Let's get all your payroll ducks in a row by talking about one of the most important routines you'll establish in your business - your payroll cycle. Think of it as getting your ducks to march in perfect formation, each one following the other in a predictable pattern.

Canadian Payroll Manual

Payroll Cycle Basics

As this Canadian Payroll Manual explains, getting your payroll cycle right is about more than just choosing how often to pay your employees. It's about creating a reliable rhythm for your business that accounts for everything from pay frequencies and extra pay periods to statutory holidays and (spoiler alert!) why advances usually aren't a great idea. Let's walk through the basics of setting up and maintaining a smooth payroll cycle that keeps both you and your employees happy.

🦆Duck Tip: Set up a separate bank account for payroll right from the start. This makes it easier to track your payroll funds, plan for those months with extra pay periods, and ensures you always have enough set aside for payday and CRA remittances.

If you are worried about bank fees, EQ Bank has a business account with no monthly fees, free unlimited transactions and currently pays 3% in interest. After each Bank of Canada rate announcement, the interest rate is reviewed and modified as necessary. As it is beta mode, you have to join their waiting list to apply. Tangerine and Simplii Financial might be options if you will have only a few transactions as their bank accounts are meant for personal use.

Now let's answer some questions about the payroll cycle you may have.

Canadian Payroll Manual

Your Payroll Rhythm

Getting your payroll ducks in a row starts with establishing a consistent rhythm. Each pay cycle follows these six steps:

1. Collect timesheet information.
2. Calculate gross pay.
3. Figure out deductions (the fun stuff like CPP, EI, and income tax).
4. Process the net pay.
5. Keep your records straight.
6. Remit those withholdings and contributions to CRA.

🦆 Duck Tip: For small businesses (under 10 employees), cloud-based payroll services like QBO Payroll Core, Wagepoint, PaymentEvolution, or Rise make these steps much easier. They handle calculations, direct deposits, and even generate your remittance forms!

Timing Recommendations
Here's how to time these steps for the two most common pay schedules:

BI-WEEKLY (Hourly Workers):
Remember there is usually a one week time delay from working the hours to being paid.

• Day 1-2: Timesheet collection/review
• Day 3: Process payroll
• Day 4: Run payroll (likely 3-4 banking days before payday)
• Day 5: Payday (for example every other Friday)

SEMI-MONTHLY (Salaried Employees):

• 15th & Last day of month: Payday
• 3-4 banking days before: Process payroll
• 5 days before: Review any changes (benefits, raises, etc.)

🦆 Duck Tip: When a payday falls on a holiday, most employers process payroll early to ensure employees are paid on the last business day before the holiday. Your payroll service can help you plan for these adjustments.

Creating a Payroll Calendar
At the beginning of each year, create a payroll master calendar for the WHOLE year. This becomes your payroll rhythm. Mark these key dates:

• Timesheet deadlines
• Processing deadlines (check your payroll service's requirements)
• Pay dates (including holiday adjustments)
• CRA remittance due dates (typically 15th of following month or it maybe once a quarter)
• Quarter-end reviews (catch any mistakes early so you can have a smooth year-end)
• ROE deadlines when needed
• Year-end deadlines (February 28th)

🦆 Duck Tip: Most payroll services offer calendar features that automatically adjust for holidays and help you track these deadlines. Take advantage of these tools - they're like having a dedicated duck keeper for your payroll flock!

Why Getting This Right Matters
Look, I get it - payroll can feel overwhelming at first. But here's the good news: once you establish your routine, it becomes second nature. Plus, staying on top of your payroll obligations:

• Keeps your employees happy (happy ducks!)
• Keeps CRA off your back
• Helps you sleep better at night (and believe me, you need a good night's sleep to have the energy to run your business!)

Let me share a quick success story:

Meet Brenda, who started a small graphic design business last year. At first, she dreaded payroll days - she'd procrastinate until the last minute, scramble to gather information, and worry constantly about making mistakes. Sound familiar?

Then she decided to get her payroll ducks in a row so she:

• Set up a simple payroll calendar.
• Created a consistent routine.
• Signed onto a reliable payroll service. She chose QBO Payroll Core because she was already using QBO Canada to do her bookkeeping and wanted to keep things as simple as possible.
• Setup a system to keep her records organized.

The result? These days, Brenda handles payroll in about 30 minutes twice a month. Her employee gets paid on time, every time. Her CRA remittances are always accurate and punctual because she used QBO's auto pay feature. Best of all? She no longer loses sleep wondering if she's done everything right.

"I wish I'd established these habits from day one," Brenda says. "Now payroll is just another routine task - like checking my email or updating my project schedule. The peace of mind is worth every minute I spent setting up the system."

🦆 Quack Fact: Remember your goal isn't perfection - it's progress. Start with good habits now, and you'll thank yourself later. After all, organized ducks are happy ducks!

Canadian Payroll Manual

Payroll Processing Methods

Let's talk about processing your payroll - one of those tasks that can feel overwhelming when you're just starting out. Trust me, payroll has never been my favourite task either. Whether you have one employee or nine, you're facing the same question: Should you go with an online payroll platform or handle it manually?

Here's the thing - while manual payroll might seem more cost-effective at first glance (especially if you only have one or two employees), I almost always recommend going the online route. Why? Because getting your payroll ducks in a row isn't just about cutting cheques - it's about building a reliable system that won't keep you up at night wondering if you calculated CPP correctly or remembered to submit your remittances on time. It's about being able to run payroll from anywhere even if you are sick or travelling.

Even with just one employee, online payroll platforms like QuickBooks Online or Wagepoint can be worth their weight in gold. They automatically calculate deductions, generate T4s, and remind you when payments are due. Yes, there's a monthly fee, but consider it insurance against costly mistakes and time spent double-checking calculations. Plus, as your business grows, you won't need to change systems - your ducks will already be lined up!

Here's an idea. Track how long it will take you to do payroll manually. I mean every task related to payroll including yearend slip preparation and monthly bank reconciliations. Assign a per hour dollar value to your time - what you would be paid if you worked for someone other than yourself? Compare your total labour calculation to the cost of the monthly payroll subscription fee. Does that change your mind on how much a payroll service would cost your business?

That said, I understand some businesses prefer to maintain more direct control or have budget constraints that make manual processing more attractive. Below, I'll walk you through both methods so you can make the best choice for your situation. Remember, whichever method you choose, the key is establishing a consistent routine that becomes second nature.

Option 1 Affordable Tech SaaS Payroll Run Routine

Here are some of the key decision points when setting up payroll on an online platform:

1. Previous payroll history (if applicable).
2. Payment method (direct deposit vs. cheques).
3. Pay schedule selection.
4. Setup completion verification.

🦆 Quack Fact: Remember this is a basic setup flow just to give you an idea of what automating payroll would look like. Your payroll host provider will give you detailed instructions and specific steps. The goal is to get your 'ducks in a row' with a simple, repeatable process that makes your payroll administration efficient especially if you take advantage of any automation benefits they offer.

Here are some of the key decision points when making a payroll run on an online platform:

1. Regularly Scheduled vs. Special or Unscheduled Payroll Run - normally you pick the scheduled run.
2. Pay Period Verification - After your first run, you usually don't have to change the pay period.
3. Accuracy Check - If you want happy employees and no CRA headaches.
4. Payment Method - Online payroll makes direct deposits easy.

🦆 Duck Tips:

• Always run payroll 3-5 days before pay date. QBO Canada Payroll sends you a notice telling you when you have to have your payroll ready for processing.
• Keep your payroll calendar handy (you created one right?).
• Double-check hours before submitting.
• Save PDF reports for your records.

🦆 Quack Fact: Remember getting your payroll ducks in a row means establishing a routine. Once you've done it a few times, it becomes second nature. And honestly, I find online payroll takes 95% of the stress around payroll away. The key is consistency and attention to detail.

Option 2 Low-Tech Manual Processing Payroll Run Routine

Your second option is to handle payroll manually for your small business. While most businesses use software these days, there are valid reasons for doing it manually when you're just starting out or have very few employees. You may have budgetary constraints, want to understand the basic payroll calculations, or just like having hands on control of the process. 

First, here's what you will need to do payroll manually:

• CRA's Payroll Deductions Tables (T4032).
• A basic Excel spreadsheet (or even a notebook, but Excel makes life easier).
• A calendar marked with payroll and remittance due dates.
• A simple filing system for your records.

Before we jump into the manual payroll, let's be honest about this process. It's more time-consuming than using software, but it helps you understand the basics of payroll calculations. This knowledge will serve you well even if you switch to software later.

The key to success with manual payroll is establishing a routine. Pick a specific day and time for payroll tasks and stick to it. This becomes your 'payroll habit'.

If you are going to choose this option, you need to be comfortable with the math behind the payroll which includes, regular pay calculations, overtime calculations, statutory holiday pay calculations, vacation pay calculations, and CRA payroll withholdings. You will need to not only have an understanding about the payroll formulas, you also need to understand how everything flows together.

Let's look at an example to help you get a feel for whether this option is a good choice for you.

It's Thursday (your regular payday), and you're processing payroll for your one employee. Here's what needs to happen:

• Gather and verify their hours.
• Calculate their gross pay.
• Apply the correct deduction rates form T4032 Payroll Deduction Tables.
• Double-check your math using PDOC (see sidebar below).
• Write out their paycheques.
• Prepare their pay statements (yes, this is legally required!).
• Record everything in your payroll register.
• File away your payroll records.

Speaking of pay statements - this is often where manual payroll gets a bit sticky. The law requires you to provide employees with a detailed statement showing their earnings and deductions each pay period. With manual payroll, this means either:

• Using pre-printed pay statement forms you can buy from office supply stores
• Creating your own template in Excel (just make sure it includes all required information!)

🦆 Duck Tips: Make it a habit to prepare pay statements while the calculations are fresh in your mind. Don't leave them for later - trust me on this one! Nothing's worse than trying to reconstruct payroll details two days later when an employee asks questions about their deductions.

Set up a payroll routine where you:

1. Process payroll the same day each pay period.
2. Write cheques and prepare statements in one sitting.
3. Keep copies of everything in an organized filing system.

When you first start, you might need to look up every rate and double-check every calculation. But once you get your payroll rhythm going, it becomes more intuitive. You'll develop a feel for when numbers 'look right' or when something seems off.

If you are going manual, I'm going to assume you want to understand the calculations. So let's take a brief look at three connected tabs in an Excel spreadsheet (password protected, of course!) and what they would contain. I caution you, I'm going to use a very simple setup and example.

Tab 1 - Employee Basic Sheet - no sensitive information is kept here. That will be in each individual employee file kept under lock and key when not in use or encrypted and passworded online. Access to any payroll data is restricted and always on as needed basis.

• Employee name
• Position/job title
• Start date
• Pay rate
• Contact information
• Emergency contact

🦆Quack Fact: Remember, the fewer places you store sensitive information, the fewer places you need to protect. Sometimes the simplest solution is the safest!

Tab 2 - Payroll Register (where the magic happens) - For this example, list your sole employee (Susan) in the row immediately under Employee Name. We are calculating the pay for the two-week period ending January 14, 2025. Set up the following columns and enter the data or calculation:

• Employee Name - Susan
• Hours Worked - 75
• Pay Rate - $20
• Regular Pay [calculation (Rate × Hours)] - 75 × $20 = $1,500
• Overtime Hours - 5
• Overtime Rate [calculation (typically 1.5 × Regular Rate)] - 1.5 x hourly rate = $30
• Overtime Pay [calculation (OT Rate × OT Hours)] - 5 × $30 = $150
• Gross Pay [calculation (Regular Pay + Overtime Pay)] - ($1,500 + $150 = $1,650)
• Vacation Pay - [calculation (Gross Pay x 4%)] - (4% x $1650 = $66)
• CPP1 deduction (from T4032 tables) - $94.09
• CPP2 deduction (from T4032 tables) - $0.00
• EI deduction (from T4032 tables) - $28.14
• Income tax (from T4032 tables) - $211.05
• Net Pay [calculation (Gross Pay + Vacation Pay - CPP - EI - IT)] - ($1,650 + $66 - $94.09 - $28.14 - $211.05 = $1,382.72)
• ROE info tracking (hours and insurable earnings)
• Note: there are also employer contributions for CPP ($04.09) and EI ($28.14 x 1.4 = $39.40) that you need to calculate and include with your remittance to CRA. Total remittance for this pay period is ($94.09 x 2) + ($28.14 + $39.40) + $211.05 = $466.77)

Tab 3 - CRA Remittance Tracker - track those government payments!

• Payment due dates - quarterly (April 15th, 2025)
• Source deductions owing - CPP, EI, Tax - $466.77 per pay period if hours and overtime don't change
• Amount paid - $466.77 x 6 pay periods = $2,800.62 for first quarter
• Payment confirmation number
• Running balance

🦆 Duck, Duck, Do! Add a simple dashboard on the first tab showing the next payroll date, the next remittance due date, the current period source deductions. This keeps your key 'must-do' items front and center.

This isn't about creating the world's fanciest spreadsheet, it's about having a reliable system that helps you process payroll consistently and correctly. When you're looking at this every pay period, you want it to be straightforward and stress-free.

Payment Options: Direct Deposit vs Paper Cheque

One of the decisions you need to make is what method you will use to distribute your employee's earnings. Here's some information to help you decide whether to go low-tech (paycheques) or affordable tech (the convenience of direct-deposit). Let's start this off with a tip.

🦆Duck Tip: While both payment methods are legal in Canada, direct deposit can save you time and reduce the risk of lost or stolen cheques.

Pros of Direct Deposit

• Funds are available to employees on payday without fail.
• No lost or stolen cheques to deal with.
• Saves time (no printing, signing, or distributing cheques).
• Most payroll software includes this feature.
• Creates an automatic audit trail.
• Employees generally prefer it.

Cons of Direct Deposit

• May require a business bank account.
• May require more manual effort if not using payroll software.
• Initial setup requires collecting banking information.
• There may be a small monthly fee from your bank.
• Need to plan processing time (usually 2-3 business days).

🦆Quack Fact: You can't legally require existing employees to accept direct deposit, but you can make it a condition of employment for new hires.

For small businesses, I like:

1. Offering direct deposit as your primary payment method.
2. Including direct deposit authorization in your new hire paperwork.
3. Using void cheques or direct deposit forms to collect banking information securely.
4. Maintaining cheque capability as backup but don't advertise this option.

Canadian Payroll Manual

A Short Word About Data Security

The Canadian Payroll Manual's security guidelines are especially relevant for home-based businesses where work and personal space overlap.

So, let's talk about something that's become super relevant with so many of us working from home - keeping your employee information private when your office is also your living space.

Here's the thing. Your dining room table might be your favorite spot to work, but if you share your home with family, roommates, or even have friends dropping by, you need to think twice about where you handle payroll.

Let's Talk About Your Primary Business Device

Here's something to really think about. You need one dedicated device (usually a computer or laptop) that's just for sensitive business stuff. Think of it as your business vault - it's where you handle payroll, banking, taxes, and anything with employee or confidential and sensitive information.

"But I like working from my phone!" 🙄 Sure, you can check email, send invoices, text employees from your phone, but payroll, banking, tax? Those stay on your primary business device. No exceptions.

Why? Because mixing sensitive business data across multiple personal devices is like leaving copies of your house key all over town. One dedicated device = less risk.

Some Home Office Tips

• Set up a dedicated workspace where others can't peek over your shoulder.
• Never leave employee files or payroll info out in shared spaces.
• Keep a lockable file box for physical documents.
• Use password protection on your computer.
• Position your screen so others can't see it when you're working or better yet, install use a privacy screen filter on your computer or devices.
• Log out of payroll software when you step away (even for a quick coffee break!).

🚫 Never:

• Email sensitive employee information.
• Store information on unsecured devices.
• Leave confidential files on your desk.
• Share passwords.
• Skip 2FA 'just this once' (Yes, it's annoying to wait for that code).
• Process payroll from your smart phone.
• Handle sensitive employee (or business) data on personal devices.

✅ Always:

• Use strong passwords (via a reputable password manager - don't try to remember them all yourself!).
• Use 2FA on every business account that offers it (it's like locking your front door - not foolproof but it helps).
• Keep security software updated.
• Keep payroll, banking, and tax work to your primary business device. (You have one right?)
• Think before mixing business and personal devices.
• Lock up physical documents.
• Limit access to authorized personnel.
• Have a data breach response plan.

🦆Quack Fact: Remember your employees trust you with their personal information. Whether you're working from an office downtown or your home office, protecting their privacy isn't just good business - it's your legal obligation!

Setting Yourself Up for Success

The Canadian Payroll Manual has gathered some best practices for micro-business owners.

Banking Best Practices

• Keep at least one extra pay period's worth of funds in your payroll account as a buffer.
• Set up email alerts for when your payroll account balance drops below a certain threshold.
• Consider scheduling automatic transfers from your operating account to your payroll account.

Reconciling Your Payroll Bank Account

Now that you've set up your banking practices, let's talk about keeping those accounts balanced. Think of it as making sure all your ducks are accounted for at the end of each month.

One of the most important habits you can develop is regularly reconciling your payroll bank account (as well as your operating bank account). 

What to Look For If You Pay By Direct Deposit:

• Direct deposits (Did they all process successfully?)
• Any manual adjustments or corrections
• Bank fees
• Account balance matches your payroll register

What to Look For If You Pay By Cheque:

• Uncashed paycheques (Has everyone cashed their cheques?)
• Void or cancelled payments (Are they properly recorded?)
• Stale-dated cheques (Cheques older than 6 months)
• Outstanding direct deposits (Did they all go through?)

🦆 Duck Tip: Set a monthly reminder to reconcile your payroll account. It's much easier to fix issues when they're fresh! Also, most of these problem goes away if you have direct deposit.

🦆 Another Duck Tip: Still using paper cheques? Consider making direct deposit a condition of employment for new hires. Your future self will thank you!

Documentation Habits

• Create a simple checklist for each pay run (I have provided a simple checklist in the next section for you to customize to your business as you refine your routine).
• Keep a payroll diary to note any special situations (like advances or corrections).
• File all payroll-related emails in a dedicated folder.
• Store sensitive employee information securely (both digital and paper records).

Common Small Business Pitfalls to Avoid

• Don't forget to account for statutory holidays when scheduling payroll processing.
• Watch out for bank processing times, especially around holidays.
• Be careful with manual calculations - even small errors compound quickly. There's nothing worse than dealing a PIER (Pensionable and Insurable Earnings Review) report from the CRA. Ugh! PIER reports from CRA happen when your reported earnings don't match your deductions. Common causes can include:
    * Incorrect calculation of CPP/EI deductions
    * Missing or late remittances
    * Errors in T4 reporting
  

Time-Saving Tips

• Process payroll at the same time on the same day - make it a ritual.
• Keep employee information sheets easily accessible but still private and secure. Protect employee privacy by:
    * Using password protection for digital files,
    * Locking physical documents in a secure cabinet,
    * Limiting access to payroll information to only those who need it,
    * Never sharing employee information via unsecured email.
• Have a backup person trained for emergencies. If you are a small business owner on your own, you could consider your bookkeeper, your spouse, a trusted friend, and eventually one of your employees.
• Set up a quarterly payroll review meeting with yourself to catch any issues early.

Emergency Preparedness

• Keep these numbers easily accessible:
    - Payroll software provider's support number
    - CRA business window (1-800-959-5525)
    - Your bank's business support line
    - Your backup person's contact information
• Have a backup plan for if your internet goes down on payroll day.
• Keep copies of essential forms both digitally and in print.

🦆 Quack Facts: Remember the key to an stress-free payroll is creating habits and sticking to them. No more scrambling at the last minute or wondering if you've missed something important. Seriously consider having a separate payroll account. It helps manage the variability in employee payments and additional pay periods in a month. When your ducks are in a row, payroll becomes just another routine task!

Your Pay Run Checklist

Before You Start Each Pay Run

• Gather time records and approve overtime
• Review any changes (salary updates, benefits, garnishments)
• Check statutory holiday eligibility
• Note: TD1 changes are covered in Section 1

Processing Your Payroll

• Calculate regular hours/salary
• Add variable pay (commissions, bonuses)
• Apply deductions in correct order
• Double-check your calculations
• Note: Benefit calculations are covered in detail under 'When to Tax Employee Perks'

Finalizing and Distributing Pay

• Review for accuracy
• Process direct deposits/print cheques
• Distribute pay stubs
• File documentation
• Note: Cash handling procedures are detailed in 'Handling Employee Cash Pay'

Post-Payroll Tasks

• Record journal entries
• Update year-to-date totals
• Prepare remittance amounts
• Note: Remittance procedures are covered in Section 3

Top 5 Common Payroll Calculation Mistakes

Let's look at the most common payroll calculation mistakes so you can avoid them:

Overtime Pay Miscalculations

• The Mistake: Using regular hourly rate instead of 1.5x or 2x for overtime hours.
• The Fix: Check your provincial labour standards for overtime rates and when they apply.
• 🦆 Getting Your Ducks Aligned: Most payroll software calculates this automatically - another reason to ditch manual calculations!

Statutory Holiday Pay Errors

• The Mistake: Not calculating average daily wage correctly or missing eligibility requirements.
• The Fix: Review your province's holiday pay formula and eligibility rules.
• 🦆 Getting Your Ducks Aligned: Keep a simple spreadsheet tracking statutory holiday eligibility for each employee.

Vacation Pay Problems

• The Mistake: Using wrong percentage or not including all eligible earnings in calculations.
• The Fix: Confirm your provincial requirements (usually 4% for under 5 years, 6% for 5+ years but check).
• 🦆 Getting Your Ducks Aligned: Include commissions and bonuses in vacation pay calculations - not just regular wages!

Worker Classification Confusion

• The Mistake: Treating employees as contractors (or vice versa).
• The Fix: Use CRA's guidelines to determine proper classification.
• 🦆 Getting Your Ducks Aligned: When in doubt, err on the side of employee classification - it's safer!

Remittance Mistakes

• The Mistake: Incorrect calculation of CPP, EI, or income tax deductions.
• The Fix: Use CRA's Payroll Deductions Online Calculator to verify your calculations.
• 🦆 Getting Your Ducks Aligned: Most of these mistakes disappear when you use payroll software that automatically calculates deductions.

Remember, these mistakes can be costly - both in terms of money and time spent fixing them. When in doubt, double-check your calculations or consult a payroll professional.

🦆Duck Dynasty: The National Payroll Institute (formerly known as the Canadian Payroll Association) is Canada's leading payroll authority. While they tend to keep their best resources behind a membership paywall, their website (payroll.ca) allows non-members to attend their webinars for a reasonable fee. They're worth checking occasionally, especially if you're considering getting more formal payroll training for yourself or future employees. At the very least, keep an eye on their 'Late Breaking Payroll News' section.

Building Good Habits

• Create a payroll calendar
• Set up reminders
• Establish review procedures
• Keep emergency contacts handy

Start transforming your payroll from chaos to clockwork by looking at some special topics for a more in-depth view!

• When to Tax Employee Perks and Benefits
• Vehicle Allowances & Reimbursements
• Handling Employee Cash Pay Cheques Properly

Section TOC

• Annual Filing Process Flowchart
• Year-End Task List
• Best Practices (Start How You Want To Finish)
• Pitfalls to Avoid When Managing Payroll
• CRA Record Keeping Requirements

    B. Specific Topics (links to separate pages)

• Monthly/Quarterly Remittances
• Year-End T4 Preparation

This next section of the Canadian Payroll Manual addresses common payroll challenges faced by micro-businesses in meeting their reporting deadlines to keep the Canada Revenue Agency happy.

Annual Filing Process Flowchart

A picture is worth a thousand words!

Simplified Yearend Payroll Procedures Task List

As the year winds down, it's time to get your payroll all quacked up—I mean, wrapped up. 😉 If you've been tracking everything throughout the year, this won't be a massive task. Let's break it down shall we?

1. Review Employee Information
   Before you can close out the year, give your employee details a once-over. Start by confirming your employee details. Verify against the newest TD1 Form that the addresses, Social Insurance Numbers (SINs), and contact information are correct. Revise as necessary. Make sure you update  any changes in pay, deductions, or benefits, make sure they are recorded accurately.
   
   🦆 Duck Tip: Have your employees complete a new TD1 form every December so you know you have the most up-to-date for your T4 slips. It's a when employees get on social media complaining they haven't received their T4. Later they find out - oops! I forgot to give my employer my latest address and email.
   
   🦆 Another Duck Tip: Need help with employee verification procedures? The article 'Hiring Your First Employee' walks you through the process step by step.
   
   
2. Reconcile Payroll Records
   Now it's time to match up those numbers. Cross-check payroll totals by comparing your year-to-date payroll summary with actual payouts throughout the year. Validate deductions by double-checking that all deductions, like income taxes withheld, Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums, are correct.
   
   
3. Calculate Bonuses
   If you're rewarding your employees with a year-end bonuses, here's your reminder to include them in the final figures. How? Make sure bonuses are calculated and included in the final pay for the year. Heads up that your withholding on bonus payments might differ from regular pay.
   
   
4. Prepare T4 Slips (Statement of Remuneration Paid)
   This may sound like a quack-load of paperwork, but it’s unavoidable. You have to create a T4 slip for each employee. A T4 slip summarizes an employee's annual earnings and deductions. You need to plan to distribute all the slips by February 28th deadline. You can hand them out or electronically deliver them (see sidebar) to your employees but it must happen before or on by the last day of February.
   
   
5. EFILE the T4 Summary to CRA
   Important Update: Starting January 1, 2024, if you issue more than five (5) information slips, you must file electronically. Paper filing is only allowed if you have five or fewer slips to submit.
   
   Get everything squared away with the government by compiling and submitting your T4 Summary. The T4Sum is a total summary of all the T4s you issued which you must send to the CRA by February 28th. Make sure the total matches the sum of all your individual T4s.
   
   🦆 Duck Tip: Most payroll software includes electronic filing capabilities, making this process much easier. If you're still doing manual payroll and need to file more than five slips, consider using CRA's Web Forms application - it's free!
   
   🦆 Duck, Duck, Do! Ensure you retain copies of T4s and related documents for at least seven years to be in compliance with CRA's business record-keeping requirements.
   
   
6. Set Up Vacation Pay Accruals (if applicable)
   Don’t let vacation pay throw you off balance. Review the labour laws around vacation pay. You need to calculate any accrued but unused, vacation pay so it’s ready for next year. If you use payroll software like QBO Canada Payroll Core, I believe an employee's vacation time balance will automatically carry over into a new calendar year saving you the hassle of yearend calculations around unused vacation pay. Right there, this makes using payroll software mandatory ... for me.
   
   My time (and yours) is valuable too but it is worth your time to check that the program rolled the correct amounts forward into the new year.
   
   
7. Review and Assign New Payroll Dates
   Staying ahead is key to reducing stress. Plan your payroll dates in advance. Set your payroll schedule for the new year, making sure to factor in compliance with any statutory holidays.
   
   
8. Back Up All Records
   Imagine a digital 🦆 duck-pond archive! Secure your data by implementing automatic, regular backups of payroll records. If you’re using payroll software, most will offer automated backup options. I also like to download PDF copies of all my payroll reports after each payroll run.
   
   🦆Duck Wisdom: When setting up your routine for data backup, remember the 3-2-3 backup rule. The rule says to setup a system that enables disaster recovery in two different ways (offline and online) is:
     (i) to keep at least three (3) copies of your data,
     (ii) store your information on two (2) different storage media,
     (iii) with at least one (1) of them located physically offsite plus (2) stored in the cloud in different geographical areas. 
   
   🦆 Duck Tip: Regularly test the restore process to ensure that your backup files work effectively when you need them. You don't want to learn you can't restore data during a crisis.
   
   
9. Planning For Next Year
   Before you close your books for the year, let's get your ducks in a row for the new payroll year coming up. For the first payroll of the year, make sure you mark your first payroll date on your calendar (you do use one right?), note any bank holidays that might affect processing times, and plan ahead if your first pay date falls near New Year's.
   
   
10. Tax Updates
    Using payroll software? They'll update the tax tables automatically (usually late December). Calculating manually? Download the new Payroll Deductions Tables from CRA. Double-check if your remittance schedule changes based on your previous payroll volume.
    
    🦆 Duck Tip: This is yet another reason I recommend using payroll software - they handle tax table updates automatically. One less thing for you to worry about!
    
    
11. Evaluate and Seek Improvement
    Use this opportunity to streamline. This simplified task list is just your starting point. Refine your processes by reflecting on this year's process and pinpoint any areas for improvement. Then revise this task list (on a regular basis) to make it customized to your business. 

🦆 Want More Detail? Check out Wagepoint's comprehensive year-end checklist [wagepoint.com/blog/payroll-year-end-checklist-canada/]. They're a leading Canadian online payroll provider, and their list covers everything from A to Z. While some items might not apply to your small business, it's a great resource if you want to dive deeper. ADP Canada usually has a good list as well.

And there you have it! Follow this simplified checklist and you’ll strut into the new year with your payroll duck feathers perfectly aligned. Remember, consistent habits build the path to a stress-free payroll system. You’ve got this!

Additional Tips for Year-End Payroll

1. Review Employee Benefits: Ensure all taxable benefits have been accurately reported and included in payroll calculations.
   
2. Check for Compliance Updates: Keep an eye on any new federal or provincial payroll regulations that might come into effect in the new year. I like to check 'What's New For Payroll' on the CRA website. I also sign up for their newsletters.
3. Bookkeeper or Accountant Review: I'm going to say this ...If possible, have a second pair of eyes, such as a bookkeeper or accountant, review your year-end reports for any discrepancies ... but honestly if you have a bookkeeper, you shouldn't be doing the payroll runs or the year-end procedures. Delegate this responsibility to your bookkeeper. Free up some time to spend with your family or friends. It will give you work-life balance which is hared to establish in your start-up years.

Best Practices All Year Long
(Start How You Want To Finish)

Let's talk about making your payroll life easier. The Canadian Payroll Manual emphasizes starting with good habits. Here are practices that will help you stay organized and compliant.

1. Set a Consistent Payroll Schedule: It will reduce your stress. Decide whether you'll run payroll bi-weekly or semi-monthly, and stick to it. Process payroll the same way each time. Keep a payroll calendar marking all due dates. Use a checklist for your payroll process. Consistency is your friend here. 
2. Digital is your friend too: Scan paper documents (but keep originals of signed forms). Use cloud storage with backup. Create a simple folder system by year and employee.
   
3. Use Simple Payroll Software: Payroll software simplifies your life and minimizes errors. It's takes a lot of the burden of tracking 'what's new'. Just make sure to choose a user-friendly payroll software that automates tax calculations and direct deposits. At this stage you should be able to use their most basic payroll service. It's unlikely you will need all the bells and whistles of the more advanced modules.
4. Keep Employee Records Up-to-Date: It will make your life easier once you start preparing our T4s if employee records are up-to-date. Develop the habit of updating employee information as soon as there are changes. Encourage employees to notify you of changes promptly. Get organized by creating a separate folder for each employee, keeping current year records easily accessible, moving older records to 'archive' storage, and labeling everything clearly with dates.
   
   🦆Duck Tip: Set a reminder in your calendar for January each year to archive the previous year's records and start fresh folders for the new year.
   
5. Meet Tax Compliance Deadlines: Avoid penalties and have smooth operations by filing and remitting on time. Familiarize yourself with your basic Canadian payroll tax deadlines. Remember you are running your business. It should not be running you!
6. Simplified Policies: It's simple. Clear rules lead to fewer misunderstandings. Write simple, clear policies about pay schedules, vacation time, and any other pertinent payroll information. Share this with your employee(s) upfront.  Just be sure to keep it up-to-date. Remember, start how you want to finish. So even if you only have one employee now, get all yours in a row to set yourself u a seamless growth.
   
   🦆Duck Tip: If writing isn't your thing, do a video instead.
   
7. Have a Contingency Plan: You want to be prepared you for those "just in case" moments like system failures, personnel absences, supplier issues. Identify someone trustworthy who can step in if you're unavailable. Keep a cheat sheet of the essential payroll steps for them. Automatically backup your data.
   
   🦆Duck Tale: Here is a real life 'Oh S**t!' story that happened in 2024. Bench Accounting unexpectedly closed on December 27, 2024, after 13 years of helping businesses. They had a solid reputation. With no notice, clients were left without access as the platform went offline. Fortunately, client access to their data was restored when Employer.com stepped in and acquired the company by December 30, 2024. This is never ideal, but stuff happens. The timing just before the end of the year could have been disastrous. In. fairness to Bench, they were making arrangements with clients to access their data so they could transition to another platform of their choosing. Still ...
8. Open Communication: Engaged employees are more likely to report issues early, allowing you to address them promptly. Let employees know they can come to you with questions.
9. Secure Handling of Payroll Data: Protect both you and your employees by taking data security seriously. Safeguard your payroll information with secure passwords and manage access to sensitive data carefully.

Pitfalls to Avoid When Managing Payroll

This section of the Canadian Payroll Manual highlights common mistakes that small business owners should watch out for.

Missing Filing Deadlines

• Pitfall: Forgetting to file forms and remit payroll taxes by deadline.
• 🦆 Getting Your Ducks Aligned: Mark important dates on your calendar and set automated reminders.

Miscalculating Deductions

• Pitfall: Incorrectly calculating or misapplying payroll deductions for income tax, CPP, and EI.
• 🦆 Getting Your Ducks Aligned: Use payroll software with up-to-date tax calculation capabilities. Regularly review official guidelines or consult with your professional payroll person.

Inconsistent Payroll Schedules

• Pitfall: Irregular payroll processing leading to confusion and errors.
• 🦆 Getting Your Ducks Aligned: Establish a consistent payroll rhythm—like clockwork, pay your ducks consistently to keep them in line. Stick to your set schedule to maintain order.

Neglecting Backup of Payroll Data

• Pitfall: Failing to back up payroll data can lead to data loss due to system failures.
• 🦆 Getting Your Ducks Aligned: Regularly back up your payroll data and maintain an additional copy in a secure cloud or off-site location.

Overlooking Provincial Employment Standards

• -Pitfall: Ignoring provincial-specific employment standards that might affect payroll.
• 🦆 Getting Your Ducks Aligned: Familiarize yourself with the labor standards in your province and ensure your payroll process complies with these regional requirements.

By keeping these pitfalls in mind and incorporating preventative measures into your habits, you'll keep your payroll process smooth and stress-free—just like ducks gliding across calm water! The key is habit formation, which will help keep your ducks in a row.

CRA Recordkeeping Requirements

Let me explain what CRA expects from you as an employer when it comes to keeping payroll records. I know it can seem overwhelming, but for a small business with less than 10 employees. The Canadian Payroll Manual shows you how it's manageable if you stay organized.

What Records Do You Need to Keep?

The basics you must keep for each employee:

• Their SIN and current address
• The dates they worked for you
• Their salary or wage rate
• All their earnings and deductions (broken down by type)
• Vacation pay calculations
• T4 information
• TD1 forms (both federal and provincial)

How Long Do You Keep These Records?

Here's the simple rule: Keep everything for 7 years. For example, if you're looking at 2025 payroll records, keep them until December 31, 2032.

Section TOC

• Hiring and Managing Independent Contractors
  
• Required Forms and Documentation (T4A, Contracts)
• GST/HST Implications
• A Special Category: The Incorporated Employee

    B. Specific Topics (links to separate pages)

• Why Worker Classification Matters
• Before You Hire A Subcontractor
• Do You Need A Written Agreement?
• Subcontractor Reporting Requirements
• T4A Information Slips
• T5018 or T4A? Which Slip Do You Use?

This next section of the Canadian Payroll Manual addresses common payroll challenges faced by micro-businesses when working with independent contractors rather than employees.

So, you've gotten your ducks in a row with your employees—great work! Now, let's chat about another important aspect of your business: working with independent contractors. Understanding how to hire, manage, and report for independent contractors can help maintain a smooth operation Your life will be better if you can save yourself from headaches with the CRA!

Hiring and Managing Independent Contractors

When you're thinking about bringing an independent contractor on board, I know it feels just like hiring an employee—but there are important differences to keep in mind. Determining whether someone is truly an independent contractor rather than an employee is not a trivial matter. Worker classification affects everything from tax obligations to legal responsibilities.

You don't provide contractors  the same benefits and withholdings as you would for employees. They generally work independently, supply their own tools, and have the opportunity for profit or risk of loss. Make sure this distinction is in writing—draft a clear contract that outlines the terms of engagement, deliverables, payment terms, and intellectual property rights.

Required Forms and Documentation

To keep everything in line, there are a few critical pieces of documentation you will need:

• Independent Contractor Agreement: This isn’t just a good idea—it's a must have. Your agreement should clarify roles, responsibilities, project details, payment schedule, and termination conditions.
• T4A Slip: You'll need to issue this slip when you pay someone $500 or more for business services outside of regular employment. Think of it as your way of reporting to CRA who you paid for what services. CRA may do a matching audit or field audit to make sure your IC reports the income on his/her tax return.
  
  Think of this slip as your "services rendered" slip. You need this when you pay someone who isn't your employee for services. Common examples are:
  
  - Freelance writers
  - Independent consultants
  - Professional speakers
  - Board members receiving fees
  
  You're spot on if you noticed that the T4A is for services, not products. If you buy products from vendors, you don't need to issue a T4A. Just keep those receipts for your business expenses. Visit my article on T4A slips for more in-depth information about T4A requirements and tips.
• T5018: This is specifically for construction subcontractors. If you're paying subcontractors for construction services (like renovations, plumbing work, electrical work), you need to issue a T5018 when you pay them more than $500 in a calendar year.

So here's a quick way to get these ducks in line:
- Buying products? → Keep the receipt, no slip needed
- Paying for services (non-construction)? → T4A
- Paying for construction services? → T5018

Don't forget to keep well-organized records of all payments, as you'll need these for tax purposes. Maintaining detailed records will also save you time and potential stress when the CRA comes knocking.

GST/HST Implications

GST/HST can be a tricky aspect of working with contractors, especially if you're new to business. I've got some suggestions for you to consider:

• Registration: Contractors and businesses must typically register for GST/HST if their taxable revenues exceed $30,000 in a year. Make sure your contractor is doing their part if this applies.
• Invoicing and Input Tax Credits: When you receive an invoice from a contractor, it may include GST/HST. You can generally claim this as an Input Tax Credit on your returns, assuming your business is registered and you’re entitled to do so. When you are registered for GST/HST, the effect on your business is neutral.
  

Again, keep those documents tidy and organized—it's all part of making sure your ducks are neatly in a row.

Personal Services Business - A Special Category

 The Incorporated Employee Is Not a Contractor or Self-Employed

The Canadian Payroll Manual addresses this special category because many small businesses encounter PSB situations.

As a small business owner, you might come across someone who wants to work with you through their corporation instead of being hired as an employee. This arrangement is sometimes called an "incorporated employee" and their corporation might be considered a Personal Services Business (PSB). Let's break this down in plain language.

What Is A PSB, Really?
Howard Levitt, a Canadian employment lawyer, describes personal services businesses as an intermediary category of workers that own their own business but are largely dependent on one client.

Why Did PSB Rules Come Into Existence?
Although a personal services business (PSB) is a Canadian Controlled Private Corporation (CCPC), it operates under different rules. PSB rules came into existence to prevent family owned corporations and/or incorporated employees from gaining access to the small business deduction.

Why Would A Business Want To Enter Into This Type of Relationship?
Usually business owners, like yourself, want an incorporated employee relationship to avoid costly payroll taxes and clearly define the intent of their working relationship as not that of employer-employee. This places more of an administrative burden on the incorporated employee as well as additional ongoing costs. Today's PSB rules may have a negative tax for the incorporated employee.

Business Owner Alert
If you hire an incorporated employee, you are not responsible for withholdings as you are entering into a contract for services. You do need to be aware incorporated employees can sue for wrongful dismissal and Mr. Levitt says you still have secondary liability if the worker doesn't pay their self-employment taxes.

If you are thinking about going in this direction, find out more information about CRA's plans for future audits of personal services businesses here.

Dependent Contractor / Non-Employee Alert
There is a tax issue when you are a sole shareholder and employee of a corporation in Canada. Incorporated employees need to be aware of this tax issue and how it affects them.

If you are thinking about going in this direction, find out more information about the personal services business tax issues here.

An Example:
Remember Laura, the certified professional bookkeeper (CPB)? Let's revisit her work relationship with your business.

Laura is a bookkeeper (CPB) who incorporated herself as 'Laura's Bookkeeping Solutions Inc.'.  She works mostly or only for your business, using your office and following your schedule. CRA might view Laura's corporation as a PSB.

What a PSB Worker Relationship Means for You as a Business Owner

• You don't deduct CPP, EI, or income tax.
• Laura will bill you through Laura's Bookkeeping Solutions Inc., her corporation.
• You still need a clear written contract
• Watch out! You could be liable if (1) Laura doesn't pay her self-employment taxes, or (2) you terminate the contract (Laura can sue for wrongful dismissal).

Red Flags to Watch For

Laura might be considered a PSB by CRA, if she works mainly or only for you, uses your equipment, follows your schedule, and takes direction from you like an employee would.

🦆 Duck Tip: If you're unsure, it's worth getting professional advice. The cost of getting it wrong can be expensive!

This next section of the Canadian Payroll Manual addresses the legal obligations faced by micro-businesses when hiring employees.

1. Tax Filings and Remittances: Employers must remit employee payroll deductions (including employees' income tax withholdings, EI premiums, and CPP contributions) to the CRA on or before the due dates.
   
   Consequences: Late filing and remittances can result in penalties and interest charges. A good practice is setting reminders well before deadlines to avoid overlooking these obligations.
   
   
2. Accurate Record Keeping: It's extremely important to maintain accurate payroll records for each employee, as mandated by the CRA and provincial employment standards.
   
   Consequences: Incorrect record-keeping can lead to audits and fines as well as employee complaints. Ensure your records are up-to-date and properly organized.
   
   
3. Compliance with Employment Standards: Be aware of federal and provincial employment standards rules regarding overtime, vacation pay, and statutory holidays as well as terminating an employee. (Things can sometimes go sideways pretty quickly in a small business.)
   
   Consequences: Non-compliance can lead to employee grievances and legal challenges. Regularly review standards and ensure your payroll practices align with them.
   
   🦆 Duck Tale: This first came on my radar when an employee went to Employment Standards about a pay issue instead of coming to me first. I pushed back on the Employment Standard officer that they should not have agreed to address the issue [non-issue] before she had discussed it with me. The employee did not give me a chance to address the issue which was an easy fix. The officer agreed. But I took the opportunity to learn what should have happened, etc..
   
   
4. Privacy and Confidentiality: Protect employees' personal and payroll information under privacy laws.
   
   Consequences: Breaches of confidentiality can lead to legal issues and damage your business's reputation. Invest in secure systems and train your staff in privacy best practices.

The Bottom Line

I know running payroll isn't the most exciting part of being a business owner - I get it. As this Canadian Payroll Manual has shown, managing payroll for a small business doesn't have to be overwhelming. But getting it right is really important for your business, your employees, and your peace of mind. The good news? Once you've got your systems in place and understand the basics we've covered in this manual, it becomes much more manageable.

Remember, you don't have to be perfect, but you do need to be diligent. Keep good records, stay on top of deadlines, and when in doubt, reach out to the CRA or a payroll professional for guidance. Your employees are counting on you to process their pay accurately and on time - and with the foundation you now have, you can deliver on that responsibility.

Still feeling overwhelmed? That's normal. Just take it one pay period at a time, and you'll find your groove.

RETURN TO >> Table of Contents

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References: CRA Publication IPG-069 Determining the Employer/Employee Relationship 

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