7 Easy Steps for Setting Up Payroll for Your Business

Starting a new business is an exciting venture, but it also comes with various responsibilities, including managing payroll for your first employee(s). Setting up payroll for your business is a crucial task that ensures your employees are paid accurately, and that your business stays compliant with legal obligations. In this step-by-step guide, we'll walk you through the process of getting started with payroll for small businesses, covering everything from paying your first employee to year end responsibilities.

Key Insights

1. As an employer it is your legal responsibility to appropriately manage payroll taxes and deductions for your employees. 
2. Payroll errors can be costly. Penalties for late or incorrect remittances kick in immediately and escalate quickly. 
3. Prioritize setting up a reliable payroll system to navigate the complexities of deductions, reporting, and tax remittances.

Step 1: Obtain a Business Number

Before you can process payroll, you need to register your business with the government and obtain a business number (BN). This unique number is used for tax reporting and employee identification purposes. You can apply to register your business through the Canada Revenue Agency (CRA). If you already have a business number, setting up a payroll account is straightforward.

Step 2: Set Up a Payroll Account Through The CRA

For tax purposes, the CRA requires that you keep a record of employee wages, hours worked, deductions, payroll frequency and more. You can setup a payroll account by visiting the CRA online portal. Once the CRA confirms your registration, they will provide you with a 15 character payroll account number that also includes your 9 digit business number.

Step 3: Collect Employee Information

In order to accurately deduct and remit taxes on behalf of your employee(s) you will first need their Social Insurance Number (SIN). Each employee must also complete both the Federal TD1 and Provincial TD1 forms. These forms are used to calculate accurate federal and provincial tax withholdings. You will also need their bank account details if you intend to pay them via direct deposit.

Step 4: Set Up a Payroll System

Before moving forward with the next steps, we highly recommend setting up a payroll management system first. If you are new to payroll, it is likely to present a learning curve as you figure out the intricacies of deductions, reporting, and remitting taxes. It is also important to be aware of the penalties for inaccurate payroll since errors can be costly. Choose a payroll system that best suits your business’ needs. You can opt for manual calculations using spreadsheets, but many small businesses find payroll software or outsourcing services more efficient and accurate. Payroll software can automate calculations, tax withholdings, and reporting, saving you time and reducing the risk of errors. Managed payroll services take it one step further by handling every aspect of payroll for you, often with added benefits like one-on-one support from a certified payroll professional and managing year-end tax filing obligations.

There are numerous payroll platforms available. Be sure to research several different options to better understand what will work best for your business. You can learn more about PayTrak’s payroll software and managed payroll services here.

Step 5: Calculate Deductions & Process Payroll

Now, it's time to process payroll. Depending on your chosen method (manual, software, or outsourcing), follow the steps to calculate gross pay, subtract deductions, and determine net pay for each employee. As an employer in Canada you are obligated to deduct federal and provincial income tax, Employment Insurance (E.I) and Canada Pension Plan (CPP) contributions from your employees’ gross wages. You can do this manually, although this is precisely when having a payroll system or service will benefit you greatly. A payroll system or service can automate data entry, calculate accurate deductions and provide pay information directly to your employees, among other things. You can also make use of the CRA’s Payroll Deductions Online Calculator (PDOC) to help you calculate source deductions.

Step 6: Remit Deductions to the CRA

After you have calculated these deductions, you must remit them to the CRA.

Typically, new small businesses are considered Regular Remitters until they have established a perfect remittance record, at which point they can apply to become Quarterly Remitters. For regular remitters, remittances are normally due on the 15^th of each month. Be sure to remit on time, every time, to avoid late penalties. They kick in immediately and increase quickly.

You can pay your remittances through the CRA website, via online banking or at any major financial institution.

Step 7: Year End Payroll Obligations

As an employer you are also responsible for preparing a T4 for each of your employees. A T4 is a record of earnings and deductions which your employees will use when filing their personal income tax returns. You must also file a T4 summary report which is a document outlining all the information recorded on the T4s you provided to your employees.

Note: In 2024, there will be changes to the T4 form, including a new line for CPP2 deductions and the Canadian Dental Benefit Plan.

While setting up payroll for your business may seem daunting, following these steps and staying diligent about compliance will serve you well in the long run. It's important to remember that payroll is a necessary function of any growing business and getting it right from the start will save you time, money, and potential legal troubles down the road.

By properly managing payroll for your employees, you not only ensure that they are paid accurately and on time but also demonstrate your commitment to their well-being. 

In addition to the practical aspects of payroll, it's important to consider the long-term implications. As your business grows, so will your payroll responsibilities. By establishing a solid foundation for payroll management early on, you can easily scale your operations and adapt to any changes in regulations or business needs.

For more information on 2024 Payroll Legislation, including helpful information and additional resources, you can download PayTrak’s 2024 Ultimate Canadian Payroll Guide.