Payroll for Your First Employee in Canada: What to Set Up and When
Last updated August 2026.
The day you hire your first employee, you stop being just a business owner. Payroll makes you a collection agent for the federal government, and the rules that come with that job start running the moment you write the first pay cheque.
That sounds heavier than it is. Payroll for one person is genuinely manageable once you know the sequence. What catches owners out is not the arithmetic. It is discovering, eight months in, that the account should have been opened before the first payday, or that the money withheld from an employee was never actually the company’s money to spend.
We spent years in the CRA’s audit division before starting Better Books Canada, and payroll files had a particular flavour. Nobody set out to keep the deductions. They just ran short one month, told themselves they would catch up, and the amount quietly compounded until it was the largest liability on a balance sheet that had never shown it.
So here is the whole setup, in the order you actually need it, with the 2026 numbers and the deadlines the CRA counts from.
The short answer
Before your first employee’s first payday, open a payroll program account with the CRA, get their social insurance number and their signed federal and provincial TD1 forms, and work out the province of employment. From each pay, withhold income tax, Canada Pension Plan contributions and Employment Insurance premiums. Then send those amounts to the CRA along with your own employer share, which for most new small employers is due by the fifteenth day of the month after the month you paid. After the calendar year ends, file a T4 slip and summary by the last day of February. If you are hiring into a restaurant or cafe, one question comes before all of that, which is whether the tips your staff receive pass through your hands, because that decides what you withhold. We set out how restaurant tips are treated separately.
Everything below is the detail behind those five moves.
Step 1: Confirm this person is actually an employee
This is the step owners skip, and it is the one that costs the most when it is wrong. Calling someone a contractor does not make them one. The CRA states plainly that all of the facts of the working relationship determine employment status, not just the intention of the parties. You and the worker can agree on paper that they are self employed, and the CRA can still look at how the work is actually done and decide otherwise.
The questions that matter are the ordinary ones. Who controls when and how the work gets done. Who supplies the tools. Whether the worker can profit or lose money on the arrangement. Whether they can send someone else in their place. Whether they work for anyone else.
If it is genuinely unclear, you do not have to guess. Either party can ask the CRA for a CPP and EI ruling, in writing, and get a decision on the record. That is a free piece of certainty, and it is far cheaper than a reassessment two years later that treats every contractor payment as salary with deductions that were never withheld.
If the person is a contractor, you are not running payroll at all. You are paying an invoice, and the ordinary rules about what records the CRA requires you to keep apply instead. If you are incorporated and the person you are trying to pay is yourself, that is a different question again, and we cover it in our piece on how to pay yourself from your corporation.
Step 2: Open the payroll account before the first remittance is due
A payroll account is not a new business number. It is a program account attached to the business number you already have, ending in RP. If you have already registered for GST/HST, you have the business number, and the payroll account is added onto it.
The CRA’s rule is that you have to register for a payroll program account before your first remittance due date. In practice, open it before the first payday. You need the account number on the remittance, and trying to sort it out in the week the money is due is how first payments go late.
Have the basics ready when you register: the business number, the legal and operating names, the type of business, the date of your first payment to an employee, how often you plan to pay, and roughly how many employees you expect.
Step 3: Collect three things before the first pay run
Three pieces of information have to exist before you calculate anything, and the CRA sets them out on its page for setting up a new employee.
The social insurance number. Ask for it and record it accurately. A wrong digit follows the file for years and shows up as a mismatch when the slips are processed.
The TD1 forms. There are two, a federal one and a provincial or territorial one, and you need them completed before you pay the employee. They tell you which personal credits to apply, which is what stops you withholding far too much income tax from someone with dependants or tuition credits, or far too little from someone with a second job.
The province of employment. This is not simply where the employee lives. It follows the establishment of the employer that the employee reports to, and it decides which provincial tax table and which provincial TD1 apply. For a business with one location and one employee this is usually obvious, and for a remote hire it deserves five minutes of thought.
Step 4: Know what comes off the cheque, and what you add on top
Three amounts come out of the employee’s gross pay: income tax, CPP and EI. Two of those three, you match or better as the employer. That employer share is real money and it does not appear anywhere in the salary you agreed on.
Here are the 2026 figures, all published by the CRA.
Canada Pension Plan. Contributions apply to earnings between the basic exemption of $3,500 and the maximum pensionable earnings of $74,600, at 5.95 percent from the employee and 5.95 percent from you. The maximum each side pays in 2026 is $4,230.45.
The second CPP contribution. Above $74,600 and up to $85,000, a further contribution applies at 4 percent from each side, to a maximum of $416 each in 2026. This is the piece that surprises employers who last looked at payroll a few years ago, because it did not exist before 2024.
Employment Insurance. The employee pays 1.63 percent of insurable earnings up to $68,900 outside Quebec, to a maximum of $1,123.07. You pay 1.4 times the employee premium, so your maximum is $1,572.30. EI is the one where the employer pays more than the employee, not the same.
Income tax. Federal and provincial income tax comes off according to the tables, adjusted by the TD1 credits. Do not calculate this by hand. The CRA’s free Payroll Deductions Online Calculator does all three deductions for a given pay period, and any real payroll software does the same automatically.
What this adds up to is the number worth writing down before you make an offer. On a salary of $55,000, your employer CPP is about $3,064 and your employer EI is about $1,255, so the position costs roughly $59,300 a year before you have added a single benefit, a phone, or a piece of equipment. At $85,000 or more, your employer side hits the ceiling on all three pieces, which is $4,230.45 of CPP, $416 of CPP2 and $1,572.30 of EI, or $6,218.75 in total. None of those employer costs carry GST/HST, which is one reason a business whose biggest expense is payroll often comes out ahead on the GST/HST quick method.
Step 5: Remit on time, and find out what kind of remitter you are
This is the deadline that matters most, because it recurs every month and the penalties start on day one.
Your remitting frequency depends on your remitter type, which the CRA sets from your average monthly withholding amount. For a business hiring its first employee, there are two realistic outcomes, both set out in the CRA’s guidance on types of remitters.
Regular remitter. This is the default for a new employer. You remit monthly, and the due date is the fifteenth day of the following month. Pay your employee in March, the CRA has to have the money by 15 April.
Quarterly remitter, new small employer. If your monthly withholding amount is under $1,000 and you maintain a perfect compliance record on your payroll and GST/HST accounts, a new employer can remit quarterly instead, with due dates of 15 April, 15 July, 15 October and 15 January. You do not apply for this. Remit quarterly unless the CRA tells you on your statement of account to do otherwise.
Two things about that quarterly option are worth understanding. First, a perfect compliance record means exactly that: no late remittances, no failure to remit or failure to deduct penalties, no overdue T4 returns, and no balance owing or overdue returns on the GST/HST account. One late payment ends it, and the record itself lasts, because compliance history is one of the four reasons the CRA gives for pulling a return for a closer look. Second, your remitter type has nothing to do with how often you pay your staff. You can pay weekly and remit monthly.
The money you withhold is not working capital. The CRA’s own wording is that every amount you deduct or withhold is deemed to be held in trust for the government until you remit it. That is not a figure of speech. It changes what happens to the amount if the business runs into trouble, and it is why payroll arrears are treated more seriously than an ordinary tax debt.
Step 6: File the T4s by the last day of February
After the calendar year ends, you file a T4 slip for each employee plus a T4 Summary. The filing due date is the last day of February following the calendar year, and the employee needs their copy by the same date.
One rule changed recently and still catches people. For returns filed on or after 1 January 2024, you have to file electronically if you have more than five slips of the same type. The old threshold was fifty. With one employee you are under it either way, but if you grow past five people, paper stops being an option and filing in the wrong format carries its own penalty of $125 for six to fifty slips.
There is one more slip most new employers have never heard of. When an employee stops working, goes on leave, or otherwise has an interruption of earnings, meaning seven consecutive calendar days with no work and no insurable earnings, you have to issue a Record of Employment. The deadline is five calendar days, which arrives much faster than a month end deadline and is the one owners miss when somebody leaves suddenly.
What it costs when this goes wrong
Payroll penalties are unusual in the tax system because they are not calculated on how much you owe. They are calculated on how late you are, and they start immediately.
On a late remittance, the CRA charges 3 percent if the amount is one to three days late, 5 percent at four or five days, 7 percent at six or seven days, and 10 percent once it is more than seven days late or is not remitted at all. A second assessment in the same calendar year, made knowingly or through gross negligence, is 20 percent. Interest compounds daily on top.
Read those numbers again in context. Three days late is 3 percent of the whole remittance. There is no annualising, no proration. That is one of the most expensive short term costs available to a small business anywhere in the Income Tax Act.
Failing to deduct in the first place carries its own penalty of 10 percent of the amounts that were not deducted, rising to 20 percent for a second or further failure in a calendar year where it was knowing or grossly negligent. This is the one that lands on employers who treated an employee as a contractor. The reassessment does not just reclassify the worker. It assesses the CPP and EI that should have been withheld, both sides of it, plus the penalty.
Filing the T4s late is comparatively gentle for a small employer. Under the CRA’s relieving administrative policy, one to five slips filed late carry a flat $100 penalty. It is a real cost, but it is not the one to lose sleep over. The remittance is.
What we saw go wrong, over and over
Trust account examinations were their own category of review, and the pattern in them barely varied.
The first was the borrowed remittance. Cash got tight, the withheld amounts sat in the operating account looking like available money, and the owner used them to cover a supplier. The intention was always to replace it next month. It compounded at 10 percent a month in penalties alone, and by the time it surfaced the arrears were larger than the original shortfall by a wide margin.
The second was the contractor who was not one. Same person, same hours, same desk, invoicing monthly for two years. When the relationship was tested against the actual facts it failed, and the assessment reached back across the whole period.
The third was quieter and more common than either. The payroll was fine, the remittances were on time, and nothing in the books tied back to it. No pay records, no TD1 forms on file, no reconciliation between what was remitted and what the slips reported. That mismatch is exactly what the CRA’s own discrepancy notices are built to catch, and a file with no supporting documentation behind a correct number still widens a review. If you want the fuller picture of how that plays out, our guide on how to prepare for a CRA audit covers what reviewers actually ask for.
Keep the pay records, the TD1 forms, the remittance confirmations and the slips, and keep them at your place of business or your residence in Canada, which is what the CRA requires unless it gives you written permission otherwise.
The obligations the CRA does not handle
Registering for payroll with the CRA is the federal half. The provincial half is separate and nobody sends you a reminder about it.
In Ontario, that means workplace safety insurance coverage if your industry requires it, and the employment standards rules on minimum wage, hours, vacation pay and public holidays, which are provincial law rather than tax law. There is also the Employer Health Tax, though most first time employers never pay it: eligible employers are exempt on the first $1 million of Ontario remuneration each year, and employers with more than $5 million in annual Ontario payroll cannot claim the exemption at all.
If you are hiring in Quebec, more of this runs through Revenu Québec rather than the CRA, including a separate provincial return and a different EI rate. That is worth a conversation before the first payday rather than after.
Running payroll for your first employee yourself, or handing it over
Payroll for one salaried employee, paid the same amount on the same schedule, is a reasonable thing to run yourself. The calculator does the deductions, the remittance is a single payment, and one T4 a year is not a burden. Set a calendar reminder for the fifteenth of every month and you will be fine.
It stops being simple faster than most owners expect. Hourly staff with variable hours, overtime, bonuses, taxable benefits, commission, vacation pay accrual, a mid year raise, a leave, somebody quitting in the middle of a pay period: each of those adds a rule, and payroll errors are cumulative because the year to date figures feed the T4.
The honest test is whether you would notice a wrong deduction. If the answer is no, the deduction stays wrong for twelve months and surfaces as a discrepancy after the slips are filed. Payroll is one of the main things that moves a business from basic bookkeeping into needing help, and it is also one of the main factors in how much a bookkeeper costs in Canada. If the rest of your records are already behind, get those current first, because payroll built on top of unreconciled books just spreads the problem. Our guide on catching up on books that are behind works through that in order, and the wider foundations are in our beginner’s guide to small business bookkeeping.
Frequently asked questions
Do I need a payroll account to pay myself from my own corporation?
Yes, if you pay yourself a salary. A salary is employment income, so it needs a payroll account, source deductions and a T4, exactly like any other employee. Dividends work differently and are reported on a T5 with no payroll account involved, which is why the choice between them changes your paperwork as well as your tax.
When do I have to remit payroll deductions to the CRA?
Most new employers are regular remitters, which means the deductions from a given calendar month are due by the fifteenth day of the following month. A new employer with a monthly withholding amount under $1,000 and a perfect compliance record can remit quarterly instead, on 15 April, 15 July, 15 October and 15 January. The CRA confirms your remitter type on your statement of account.
How much does an employee cost above their salary in Canada?
In 2026, your employer share is 5.95 percent of CPP earnings between $3,500 and $74,600, 4 percent on earnings from $74,600 to $85,000, and 1.4 times the employee’s EI premium of 1.63 percent on insurable earnings up to $68,900. On a $55,000 salary that is roughly $4,300, and the employer side maxes out at $6,218.75 once the salary reaches $85,000.
What happens if I remit my payroll deductions late?
The penalty is based on how late you are, not on how much you owe. It is 3 percent at one to three days late, 5 percent at four or five days, 7 percent at six or seven days, and 10 percent beyond seven days or if nothing is remitted, with 20 percent for a second assessment in the same calendar year made knowingly or through gross negligence. Interest compounds daily on top of that.
Can I just pay my first hire as a contractor instead?
Only if the working relationship genuinely is a contractor relationship, because the CRA decides status on the facts rather than on what the agreement says. If the arrangement is really employment, you face a reassessment for the CPP and EI that should have been withheld from both sides, plus a penalty of 10 percent of the amounts not deducted. When it is unclear, request a CPP and EI ruling in writing before the first payment rather than after.
Getting the first one right is most of the work
Almost every payroll problem we clean up traces back to the setup rather than the running. The account opened late, the status never tested, the first remittance missed while everyone worked out who was doing it. Get those three right and the monthly rhythm takes very little effort.
If you would rather not carry it, our payroll service handles the registration, the deductions, the remittances and the year end slips, and you can get in touch before you make the offer so the numbers are settled first.
