Hiring Your First Employee in Canada: Tax Obligations and Payroll Setup

Hiring your first employee is a milestone for any small business, but it comes with a set of tax obligations that start immediately. The CRA requires you to register for a payroll account, calculate and withhold source deductions from every paycheque, remit those deductions on time, and file annual information returns. Getting it wrong can result in penalties and interest that add up quickly. Here is what you need to know.

Step 1: Open a CRA Payroll Account

Before you pay your first employee, you must register for a payroll program account with the CRA. If you already have a Business Number (BN) for GST/HST or income tax, you are adding a payroll account (RP) to your existing BN. If you do not have a BN, you will get one as part of the registration.

You can register:

• Online through CRA My Business Account or the Business Registration Online service
• By phone at 1-800-959-5525
• By mail using Form RC1 (Request for a Business Number)

Registration should be completed before your first payday. The CRA will assign a payroll account number in the format: 123456789RP0001.

Step 2: Determine if the Worker Is an Employee or Contractor

Before setting up payroll, confirm that the person is actually an employee and not an independent contractor. The CRA looks at several factors:

Factor	Employee	Contractor
Control over how work is done	Employer directs the work	Worker controls methods
Tools and equipment	Provided by employer	Provided by worker
Financial risk	None (guaranteed pay)	Bears profit/loss risk
Ability to subcontract	Cannot hire a replacement	Can hire helpers
Integration	Integral part of business	Independent service provider

No single factor is decisive. The CRA examines the overall relationship. If you misclassify an employee as a contractor, you can be held liable for all unremitted CPP, EI, and income tax that should have been withheld, plus penalties and interest.

When in doubt, you can request a CPP/EI ruling from the CRA using Form CPT1 to get an official determination.

Step 3: Calculate Source Deductions

Every time you pay an employee, you must calculate and withhold three types of source deductions:

1. Canada Pension Plan (CPP) Contributions

• Both the employer and employee contribute to CPP
• For 2025, the employee contribution rate is 5.95% of pensionable earnings between the basic exemption ($3,500) and the first maximum ($71,300)
• CPP2: A second additional contribution applies on earnings between the first ceiling and the second ceiling ($79,400 for 2025) at a rate of 4%
• The employer matches the employee's CPP and CPP2 contributions dollar for dollar
• Total employer cost: the employee's deduction amount, matched 1:1

2. Employment Insurance (EI) Premiums

• The employee contribution rate for 2025 is 1.64% of insurable earnings up to the maximum ($65,700)
• The employer pays 1.4 times the employee's EI premium
• If the employee contributes $100 in EI, the employer contributes $140

3. Income Tax

• Withhold federal and provincial income tax based on the employee's TD1 form (Personal Tax Credits Return), which they complete when hired
• The CRA's Payroll Deductions Online Calculator (PDOC) or published payroll tables tell you exactly how much to withhold for each pay period based on the employee's earnings, province, and claim codes

Using the CRA's Tools

The CRA provides free tools to calculate deductions:

• Payroll Deductions Online Calculator (PDOC) at canada.ca - enter the pay amount, frequency, and province to get exact deduction amounts
• Payroll Deductions Tables (T4032) - published annually for each province, showing deductions by pay range and pay frequency
• Payroll Deductions Formulas (T4127) - for those using payroll software or spreadsheets

Step 4: Remit Source Deductions to the CRA

After withholding deductions from your employee's pay, you must remit (send) those amounts to the CRA, along with your employer's share of CPP and EI.

Remittance Frequency

Your remittance frequency depends on your average monthly withholding amount (AMWA):

AMWA	Remittance Frequency	Due Date
Under $3,000 (new employer)	Quarterly	15th of the month after the quarter ends
$1,000 to $24,999.99	Monthly	15th of the following month
$25,000 to $99,999.99	Twice monthly (accelerated)	25th and 10th
$100,000 or more	Up to four times monthly	3rd working day after pay period

Most small businesses with one or a few employees will remit monthly or quarterly. New employers with a perfect compliance history may qualify for quarterly remittance.

How to Remit

• Online through your financial institution's business banking (most support CRA payroll remittances)
• My Payment on the CRA website
• At your bank using the remittance voucher (Form PD7A) the CRA mails to you

Each remittance must include the total of employee deductions (income tax, CPP, EI) plus the employer's share of CPP and EI.

Step 5: Issue T4 Slips

By the last day of February following each calendar year, you must:

1. Prepare a T4 slip for each employee showing their total earnings and all deductions for the year
2. Give each employee their T4 slip (two copies)
3. File the T4 Summary and all T4 slips with the CRA

You can file T4s electronically through the CRA's Internet File Transfer service or Web Forms application. If you have more than 50 T4s, electronic filing is mandatory.

What the T4 Shows

The T4 reports:

• Total employment income (Box 14)
• CPP contributions deducted (Box 16)
• EI premiums deducted (Box 18)
• Income tax deducted (Box 22)
• Pensionable earnings (Box 26)
• Insurable earnings (Box 24)
• Various other boxes for taxable benefits, union dues, etc.

Step 6: Record of Employment (ROE)

When an employee stops working for you, whether they quit, are laid off, or their contract ends, you must issue a Record of Employment (ROE) within five calendar days of the interruption of earnings.

The ROE is filed electronically through Service Canada's ROE Web application. It provides the information Service Canada needs to determine the employee's eligibility for Employment Insurance benefits.

Key information on the ROE:

• Reason for separation (resignation, shortage of work, dismissal, etc.)
• Total insurable hours and insurable earnings
• Pay period type and final pay period details

Late or missing ROEs can delay your former employee's EI claim and may result in penalties for you.

Penalties for Non-Compliance

The CRA takes payroll obligations seriously. Common penalties include:

Violation	Penalty
Late remittance (3 days or less)	3% of the amount due
Late remittance (4-5 days)	5% of the amount due
Late remittance (6-7 days)	7% of the amount due
Late remittance (more than 7 days)	10% of the amount due
Repeated late remittance (within same calendar year)	20% of the amount due
Failure to deduct	10% of the amount that should have been deducted (first occurrence)
Late T4 filing	$100 per day per employee, minimum $100, maximum $7,500

Additionally, interest is charged on overdue amounts at the CRA's prescribed rate, compounded daily.

Director liability: If your business is incorporated and fails to remit source deductions, the CRA can hold directors personally liable for unremitted amounts, including penalties and interest. This is one of the few areas where the corporate veil does not protect you.

Payroll Frequency and Pay Periods

You choose how often to pay your employees. Common options:

• Bi-weekly (every two weeks, 26 pay periods per year) - the most common in Canada
• Semi-monthly (twice a month, 24 pay periods per year)
• Monthly (12 pay periods per year)
• Weekly (52 pay periods per year)

Your province's employment standards legislation may set a minimum pay frequency. Most provinces require at least semi-monthly payment.

The pay frequency affects your source deduction calculations (the CRA tables are organized by pay period type) and your remittance schedule.

Provincial Considerations

In addition to federal requirements, remember:

• Workers' compensation (WSIB/WorkSafeBC/etc.): Most provinces require employers to register with the provincial workers' compensation board and pay premiums. This is separate from CRA payroll.
• Provincial health tax: Some provinces (Ontario EHT, British Columbia EHT, Manitoba HE Levy) impose a payroll tax on employers once total payroll exceeds a threshold.
• Employment standards: Each province sets minimum wage, vacation pay, overtime rules, and statutory holiday requirements. These affect your total payroll cost.

Getting Started Checklist

1. Register for a CRA payroll account (RP)
2. Have your employee complete a TD1 form (federal and provincial)
3. Determine the correct pay frequency
4. Use the CRA's PDOC or payroll tables to calculate deductions for each pay period
5. Withhold CPP, EI, and income tax from each paycheque
6. Remit deductions plus your employer share to the CRA by the due date
7. Keep detailed payroll records for at least six years
8. File T4 slips by the end of February each year
9. Issue an ROE within five days if the employee's employment is interrupted

Sources

1. CRA Payroll Overview - Starting point for all CRA payroll requirements.
2. CRA Opening a Payroll Account - How to register for a payroll program account.
3. CRA Payroll Deductions Online Calculator - Free tool for calculating CPP, EI, and income tax deductions.
4. CRA Remitting Payroll Deductions - Remittance schedules, methods, and due dates.
5. CRA Employee or Self-Employed? - Guide RC4110 for determining worker classification.
6. Service Canada Record of Employment - ROE requirements and electronic filing.
7. CRA Penalties and Interest for Payroll - Penalty rates for late remittances and failures to deduct.