Processing payroll means compensating employees for their work. It involves calculating total wage earnings, withholding deductions, filing payroll taxes and delivering payment. These steps can be accomplished manually, but an automated process is usually more accurate and efficient and may help you comply with various payroll regulations.
How do you manually process payroll?
If you’re a small business with only a few employees and choose to process payroll manually, you will need to keep precise records of hours worked, wages paid and worker classifications, among other details. You must also ensure your calculations are correct and remember to file all the necessary taxes and paperwork with government authorities on time. As you add more employees, the more challenging payroll becomes and any mistakes you make can result in costly tax penalties.
Payroll’s impact on cash flow
Even if you’re not paying someone else to do payroll for you, it’s still considered a business expense. This is because your employees’ wages and your share of payroll taxes cut into your profit margin. And if business slows down, you may be faced with the difficult decision of delaying payments or diverting money from other resources.
One way to limit payroll’s impact on your cash flow is to pay your people using direct deposit instead of paper cheques. Because you don’t know when someone will cash a pay cheque, it becomes more difficult to ensure you always have sufficient funds in your bank account. With direct deposit, you only need to cover the cost of payroll on certain days of the month, allowing you to better manage your finances. Plus, going digital cuts the expense of printing paper.
Payroll regulations
Certain aspects of payroll processing are regulated by the Canada Revenue Agency (CRA), Revenu Quebec (RQ), Employment and Social Development Canada (ESDC), and labour standards defined by each province, or federal labour standards for federally regulated industries. Some of the laws you must comply with include:
Provincial or Federal Labour Standards Acts
Certain industries fall with the Canadian Federal Labour Standard regulations, while most employers are bound by the provincial labour standards acts specific to each province they operate in. These federal and provincial labour standards rules define such things as the applicable minimum rates of pay per hour, overtime rates and which hours worked are subject to overtime rates of pay, stat holiday rates of pay and eligibility for stat holiday pay. This means that you need an accurate means of tracking time and attendance so you can apply overtime wages in accordance with the laws in effect for the Canadian jurisdictions you operate in.
These federal and provincial labour standards also define which records the employer must keep and for how long, number of weeks of vacation entitlement, what items must be displayed on employee pay statements rules, rules around unpaid leaves, bereavement leaves, sick time, etc. Payroll records, for example, typically include hours worked each day, total hours worked during the workweek, the basis on which employee wages were paid, regular hourly pay rate, total overtime for the work week, date of payment and the period covered, and total wages paid each period.
Federal Employment Insurance (EI)
EI requires that a portion of every employee’s EI subject wages (which includes most types of earnings and some taxable benefits) to help pay for Employment Insurance benefits. Each pay period, you must deduct EI on the employees EI subject wages at a 2021 rate of 1.58% for employees outside of Quebec, or 1.18% (1.20% for 2022) for Quebec employees until the annual maximum deduction is met, which for 2021 is $889.54 ($952.74 for 2022) for employees outside of Quebec and $664.34 ($732.60 for 2022) for Quebec employees. You’re also required to remit an employer EI contribution that is based on your employees’ EI deductions. The employer rate is 140% of the employee deductions, but your employees are covered by a disability plan (Short Term & Long Term disability) you may be eligible for a reduced employer rate.
Canada Pension Plan and Quebec Pension Plan (CPP and QPP)
Employees begin having CPP (non-Quebec employees) or QPP (Quebec employees) deducted from their pays the first pay date of the month following their 18th birthday. The 2021 maximum subject wages are $61,600.00 ($64,900 for 2022) for all of Canada, and there is a $3,500.00 annual exemption amount that is converted to its per pay equivalent when calculating CPP/QPP on a given pay. Subject wages include most types of earnings and most taxable benefits; there are some taxable benefits that Quebec has deemed subject to QPP that federally are not considered as subject to CPP. CPP is deducted from subject wages at a 2021 rate of 5.45% (5.70% for 2022) while QPP is deducted at a 2021 rate of 5.90% (6.15% for 2022). Existing legislation projects CPP rates rising each year to an estimated 2023 CPP rate of 5.95% and for QPP rising to an estimated rate of 6.40%. And beginning in 2024 there will be a new contribution element known as Additional Yearly Maximum Pensionable Earnings (AYMPE) for the first portion of the employee’s in excess of the maximum pensionable earnings with a projected contribution rate of 4%.
The year an employee turns eighteen the annual maximum CPP/QPP deduction is prorated based on the number of months in the year starting with the month following the person’s eighteenth birthday divided by 12 then times the annual maximum deduction.
QPP deductions continue for Quebec employees until they retire. For non-Quebec employees CPP deductions continue until the first pay of the month following their seventieth birthday (with the maximum CPP deduction that year prorated on the basis of the number of month in the year up to an including the month the employee turned seventy divided by 12 then times the annual maximum deduction) or until the month following the employee’s sixty-fifth birthday where that employee opted to start collecting CPP prior to their seventieth birthday and submitted a completed CPT30 form. Employers also contribute to CPP and QPP as a dollar for dollar match of their employees’ contributions.
Payroll processing province by province rules and regulations
In addition to federal regulations, you must abide by provincial payroll processing laws. Each province has its own rules, some stricter than others, governing minimum wage, overtime rules, additional remittances owing to that province, payday schedules and record keeping. So, if you’re conducting business across provincial lines, your payroll compliance becomes that much more difficult.
A good way to stay compliant is to task an executive or someone from your legal department to compile a list of all the labor laws that apply to your organization. Ask that he or she track changes to existing laws and document any new laws being proposed. Review these findings on at least a monthly basis so you can adequately adapt your operations and avoid penalties.
View Payroll and Employment Tax Resources
View Pay Equity Laws
Apply for a federal Business Number
An employer identification number, also known as federal Business number, is a fifteen-digit number (format: 000000000RP0000) the Canada Revenue Agency (CRA) uses to track your organization for tax purposes. Think of it as a Social Insurance number for your business. You can apply for an BN free of charge via ‘How do you open a payroll program account - Canada.ca’ which allows for application online or by phone. Once approved, it typically won’t be cancelled or replaced, and will usually stay associated with your organization for as long as you stay in business. Some provincial governments (Quebec, Ontario, Manitoba, Newfoundland, Northwest Territories, and Nunavut may also require you to have a separate tax identification number for each one of these provinces you operate in. And you will need to register with the applicable workers compensation agency for each province you operate; these agencies go by different names in each province.
Documents required for payroll
Before you begin processing payroll, you generally need to gather these documents, some of which may be required by government agencies:
- Exemption Claims Forms and worksheets TD-1, TD1X, TD1prov, TP-1015.3-V
On their first day of work, new hires usually complete Federal TD1 (most employees) or TD1X form (commissioned employees), and worksheets such as Federal TD1-WS, along with provincial claim forms and worksheets such as Quebec TP-1015.3-V or Ontario TD1ON, which you will use to deduct the correct amount of federal income tax from their pay. Although not required, your employees should fill out a new form each year if they claimed an exemption of other than basic single in the prior year or will be claiming an exemption of other than basic single in the current year. - Employment Eligibility Verification
In Canada, employers are expected to verify the eligibility of that person to work in Canada. This is done by the person supplying their Social Insurance Number (SIN) if this number begins with a 9 that indicates that this person has a temporary work permit for Canada and the SIN will also include the expiry date of that SIN. - Tax Identification Numbers for Contractors
If you hire independent contractors, you should ask them to provide their name, address and either the CRA Business Number of their business or their Social Insurance number. At the end of the year, you will include the information on the T4A which shows how much you paid that independent contractor. - Job application
Although candidates often supply a resume, job applications help you obtain consistent information about potential new hires. Most require a signature, verifying the accuracy of the details, which you can use to start preparing a payroll record for anyone you decide to hire. - Bank information
If you plan to offer direct deposit, you will need your new employees to provide you with the name of their bank and an account number and a transit number. Or, they can supply a voided cheque. - Benefits enrollment forms
You may have the best intentions and truly care about your employees’ health and wellbeing, but you can’t deduct insurance premiums for items such as medical and dental plans, disability plans, group term life insurance plans from their pay without first obtaining written authorization. - Retirement plan documents
Like health benefits, retirement plans are a voluntary payroll deduction and require an employee’s signature before you can withhold contributions to a RPP, or RRSP plan.
How to classify workers
To comply with federal and provincial payroll tax laws, you need to properly classify your workers as either employees, arms-length persons, or independent contractors. The general steps to do this are:
- Assess the nature of the work being done.
CRA offers a guide to assist in determining if a worker is an independent contractor or an employee (RC4110 Employee or Self-employed? - Canada.ca). - Determine if payroll deductions apply.
Withhold income tax, Canada Pension Plan or Quebec Pension Plan, Employment insurance and Quebec Parental Insurance Plan only on wages paid to employees, not independent contractors. These types of workers must themselves pay the applicable remittances on their income. - File Forms T4, and/or T4A and Tax summaries associated with these forms with CRA for employees and contractors. For any Quebec employees it will also be necessary to file Releve 1 and/or Releve 2 (for all but independent contractors) along with the associated summaries for these forms to Revenu Quebec (RQ).
Include all forms of compensation paid to employees, including wages and taxable benefits, as well as the taxes that were withheld.
Pay particular attention to details when determining a worker’s status. Misclassifying a worker can result in penalties and you may be responsible for any unpaid wages, including overtime. If you need help determining the status of a worker, you can submit to CRA a form CPT1 to request a ruling on a given person’s status.
What is a typical payroll cycle?
The most common payroll cycle or pay period in the Canada is biweekly. See how it compares to other payroll frequencies:
| Payroll Cycle | Pay cheques Per Year |
|---|---|
| Biweekly | 26 (27 pays once every 11 years) |
| Weekly | 52 (53 pays once every 7 years) |
| Semimonthly | 24 |
| Monthly | 12 |
Payroll schedule considerations
Payroll schedules are a matter of preference, but minimum standards may apply. Some provinces require at least semimonthly payments for all employees, while others have specific frequencies for different types of workers. If you are not bound by legislated pay day requirements, you can choose whichever pay period works best for you and your workers. Employees, especially those in low-wage jobs, usually prefer to be paid more often, but as your pay frequency goes up, so does your payroll processing costs. You’ll need to carefully weigh the expectations of your workforce and your budget and comply with all labour laws.
Create a payroll policy
To ensure that your payroll is accurate, processed timely and in accordance with all regulations, you’ll need to establish guidelines with both your employees and your payroll department. A typical payroll policy covers:
Workweek definitions
Clearly defined workweeks are necessary to comply with the applicable provincial or federal Labour Standards overtime rules, as well as provincial wage payment requirements. You can choose when your workweek starts and ends, but they typically must constitute seven consecutive 24-hour periods.
Time and attendance
Accurate payroll begins with precise timekeeping. Your employees should know how to log their hours – time clock, paper timesheets, etc. – the approval process, and disciplinary action for submitting false records.
Break periods
The federal and provincial labour standards acts define the required lunch or meal breaks. When offering rest periods, clearly define their length and let employees know if the break is paid or unpaid and if they need to clock their time.
Overtime
Explain who is eligible for overtime pay and how the rate is applied based on the labour standards that apply for that EE. You must first identify if your business is under Federal labour standards, or under the provincial labour standards in effect for the province that employee worked in. Both the Canadian Federal Labour Standards Act and each provinces’ labour standards define both minimum hourly rates of pay, as well as which hours are to be treated as overtime and paid at one-and-a-half times the employee’s hourly rate of pay. Eligibility for overtime is defined by each jurisdiction and is defined by hours worked in a week, or hours worked on a given day, or by either of the two conditions being met.
Pay periods
Document how often you will pay your employees. Weekly, biweekly and semimonthly are the most common. Also note which specific day of the week (or date(s) in the month for semi-monthly or monthly payrolls) will serve as payday.
Mandatory payroll deductions
Make clear all the federal and provincial taxes that will be deducted from your employees’ pay cheques. Include information on the forms they need to complete to get their withholding amounts correct and how wage garnishments work.
Voluntary payroll deductions
If you offer your employees health insurance or retirement plans, explain the costs and how they can participate. Also provide information on paying for benefits on a pre or post-tax basis.
Wage structure
Be transparent about the different ways employees are compensated at your business, whether it’s hourly pay, salary, bonuses, commission, or stock options. In addition, pay careful attention to provincial laws covering the payment of final wages to those who leave your organization.
Payroll recordkeeping
The Federal and provincial tax authorities require payroll records to be kept on file for certain periods of time (for CRA this is 7 years). Document the recordkeeping laws that apply to you and how you will maintain confidentiality.
Designate a payroll manager
Every business needs someone to administer payroll. You can hire an employee specifically for this purpose, but in most cases, the role is filled by an office manager, human resources director or even the owner. As a result, many payroll administrators have responsibilities beyond simply running payroll. They’re often tasked with providing customer support and answering employee questions, analyzing the payroll system, keeping up with regulatory issues, working with auditors, and troubleshooting technical errors.
Those who excel as a payroll manager have a specific skill set. They tend to be detail-oriented, organized, analytical and technically inclined. Their success, however, requires the collective teamwork of employees, managers, and the human resources department. For example, workers must submit accurate information and managers need to promptly approve timecards for payroll to be processed correctly and timely.
Track employee time and attendance
How your payroll administrator manages time and attendance – whether it’s a time clock, a mobile app or a pencil and paper – is entirely up to you. Keep in mind, however, that doing it manually opens the door to human error. You can help eliminate many of these mistakes, speed workflows and make the payroll manager’s job easier by using an automated time and attendance solution that integrates with payroll.
Calculate taxes
As an employer, you’re responsible for calculating and withholding money for federal, and provincial taxes from every employee’s pay cheque. The amount you withhold is determined by the Forms TD-1 W-4 submitted by your employees and current tax rates. In addition, the Canadian government requires that you deduct federal income tax Employment Insurance (EI), and (for non-Quebec employees) Canada Pension Plan (CPP); while for your Quebec employees RQ requires that you deduct Quebec income tax, Quebec Pension Plan (QPP), and Quebec Parental Insurance Plan (QPIP). If you have employees in the Northwest Territories or Nunavut you will need to deduct the 2% payroll tax and remit those amounts. And as an employer you are required to also contribute to CPP, EI, and QPP, based on your employee’s contributions; and for your Quebec employees contribute to QPIP based on the current employer rate, Health Services Fund (HSF), and CNESST. If you have employees in Ontario, as an employer you may well be subject to the Ontario Employer Health Tax (EHT), while if you have employees in Manitoba and/or Newfoundland there may well be contributions to each of those provinces’ HAPSET (Health and Posy Secondary Employer Tax) programs. In addition, there are workers compensation premiums owing for each province you have employees perform work in.
Withhold additional payroll deductions
Employees can choose to have you withhold money from their pay cheques to fund retirement plans and insurance premiums. Each of these requires a separate consent form. Sometimes, you must also withhold deductions for court-ordered garnishments, such as child support and alimony.
Pay statement compliance
Most provinces require you to provide a pay statement in either print or electronic format at the time wages are paid. Some laws allow employees to opt in or out of electronic statements and you may have to ensure they are able to easily view or print their pay information.
The goal of these regulations is transparency. The hourly rate, hours worked, taxable benefits, gross pay, net pay and deductions are usually required details. Avoid violations by contacting provincial labour standards agencies for specific pay statement guidelines.
How to issue pay cheques
You can purchase cheque stock from the bank that has your payroll account or a stationary supply store. When placing your order, make sure that the cheque stock is designed to prevent fraud, uses magnetic ink that can be interpreted by bank cheque readers and has all of the necessary information. Most will display your business name, the employee’s name, and address, the cheque number and date, and the bank’s name and address. Once the cheques are printed, seal them in a double-window envelope so that the destination and return addresses are visible, apply the appropriate postage and put them in the mail. This process can be simplified by using a payroll service, which in some cases, includes creating the cheque stock, printing pay statements, placing in pay statements in sealed envelopes and delivery.
Direct deposit vs. pay cheque
Printed pay cheques were the tried and true method of compensation for many years, but thanks to technology, paying via direct deposit has become the predominant way for Canadian employers to pay their employees.
Direct deposit electronically transfers money from your payroll bank account to the personal bank account of your employees. The transactions are fast and most banks don’t charge for it. For these reasons, direct deposit has greatly surpassed printed cheques as the preferred method of payment. However, employees must have a valid bank account that is eligible for direct deposits.
Whichever wage payment methods you choose to offer to your employees, be sure to review all provincial-specific requirements. Most allow electronic payment, but it generally cannot be the only option.
How can I improve my payroll process?
Long hours spent on administrative work and responding to letters from the CRA, or RQ, or other provincial tax agencies, or court orders for wage garnishments or support payments are tell-tale signs that your payroll process could use some improvements. Here are some tips to streamline your operations:
- Unify your pay periods
Paying different types of workers on different schedules (i.e. paying hourly employees weekly and salaried employees semimonthly) complicates payroll. Find a pay period that complies with provincial laws and works best across your entire workforce. - Invest in payroll software
The automated features available in payroll software eliminate repetitive tasks, like manual data entry. This reduces errors, saves time, and improves compliance. - Integrate your payroll with other processes
Many types of payroll software can be seamlessly integrated with time clocks and accounting ledgers. When these operations are in sync, you may have more accurate payroll calculations. - Use digital timekeeping solutions
Paper timesheets often lead to mistakes. Time tracking software uses biometric identification to prevent fraud and automatically calculates the hours worked. - Keep current with regulatory requirements
Laws governing payroll and employment are constantly changing. Staying informed of the latest legislation will help you maintain compliance and avoid expensive penalties. - Work with a payroll service provider
Often, the surest way to improve your payroll process is to work with a provider who can handle all aspects of payroll on your behalf. You may have peace of mind knowing that your employees are paid on time and your taxes are prepared correctly.
Payroll processing FAQs
See what other employers are asking about payroll processing:
How long does payroll take to process?
The method you choose to process payroll will determine how long it takes. Manual calculations can take hours to days, depending on how many employees you have and the laws that you must comply with. If you’re a large business that operates across provincial lines, processing payroll this way is usually unfeasible. A more efficient approach is to use payroll software, which can run payroll in minutes thanks to automation.
What is full-cycle payroll processing?
The amount of time in between each pay day is known as a payroll cycle. It can be as short as a week or as long as a month. During this period, several repeatable steps take place:
- Employees work and track their hours
- Gross pay is calculated based on pay period salary, or hourly wage times hours
- Taxes and other deductions are withheld from wages, and applicable taxable benefits are included when calculating taxes.
- Net pay is delivered to employees via direct deposit, or pay cheque
What is end-to-end payroll processing?
End-to-end payroll processing integrates payroll with other aspects of workforce management, such as performance measurement, training, scheduling, benefits, and compensation. By making this connection, you can improve communication, recordkeeping, analytics, and efficiency throughout the employee life cycle.
Why is the payroll process important?
Payroll processing is important because paying employees late or filing taxes incorrectly may result in penalties and interest on back taxes. Payroll that’s unreliable can also hurt employee morale and tarnish your business reputation. When you consider these ramifications, it’s often best to dedicate the necessary resources, whether it’s time or money, to make sure you get payroll right.
What is needed to process payroll?
A payroll process must be in place before you hire your first employee. You generally will need to:
- Apply for a federal Business number (BN)
- Obtain provincial tax identification numbers, and identification numbers for provincial Workers Compensation agencies, if applicable
- Gather employee tax documents (Form TD-1, Form TD-1WS, TD-1X (for commissioned employees), TD-1provincial or TD-1WSprovince, and (for Quebec employees) Form TP-1015.3-V )
- Open a bank account specifically for paying employees and taxes
- Hire or designate a payroll manager
- Develop a payroll schedule
- Create a company payroll policy
What are the types of payroll processing?
When it comes to processing payroll, you have several options to choose from, depending on the size of your business and individual needs. The most common are:
- Do it yourself (DIY)
- Outsource payroll to an accountant
- Purchase payroll software
- Work with a managed payroll provider
This guide is intended to be used as a starting point in analyzing an employer’s payroll obligations and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
