Payroll Deductions for Small Business Owners: What You Must Withhold and Remit
The moment you hire your first employee in Canada, you become responsible for withholding and remitting payroll deductions to the CRA. Getting this wrong is one of the fastest ways to end up with a penalty bill — CRA holds directors personally liable for unremitted payroll source deductions.
Here is what every small business owner needs to know.
The Three Source Deductions You Must Withhold
1. Income Tax
You must withhold federal and provincial income tax from every employee’s paycheque. The amount depends on the employee’s annual salary, their TD1 form (Personal Tax Credits Return), and their province of employment. Use the CRA’s online Payroll Deductions Online Calculator (PDOC) or certified payroll software to get the exact amount.
2. Canada Pension Plan (CPP) Contributions
For 2026, employees contribute 5.95% of pensionable earnings (between the basic exemption of $3,500 and the Year’s Maximum Pensionable Earnings of $74,600). You as the employer must match the employee’s CPP contribution dollar-for-dollar. So for every dollar your employee pays, you pay one too.
CPP2 (Second Additional Contributions): Since 2024, both employees and employers also contribute at 4% on earnings between the YMPE ($74,600) and the Year’s Additional Maximum Pensionable Earnings (YAMPE, $85,000 for 2026). This also requires employer matching.
3. Employment Insurance (EI) Premiums
For 2026, employees pay 1.63% of insurable earnings up to the annual maximum insurable earnings of $68,900. Employers pay 1.4 times the employee’s EI premium — meaning for every $1.00 your employee pays, you pay $1.40.
When and How to Remit
CRA assigns you a remittance schedule based on your average monthly withholding amount (AMWA) from two years ago:
- Regular remitter: AMWA under $25,000 — remit by the 15th of the following month
- Quarterly remitter: New small employers with average monthly withholding under $1,000 may qualify to remit quarterly
- Accelerated remitter Threshold 1: AMWA $25,000–$99,999 — remit twice a month
- Accelerated remitter Threshold 2: AMWA $100,000 or more — remit within 3 business days
Most new small businesses start as regular remitters. You remit using CRA My Business Account, your bank’s CRA payment portal, or in-person at a financial institution.
T4 Slips: Your Year-End Obligation
By the last day of February each year, you must issue T4 slips to each employee and file a T4 Summary with CRA. The T4 shows each employee’s total employment income, CPP contributions, EI premiums, and income tax deducted for the year.
Late T4 filing carries penalties of $25/day up to $2,500, and CRA can assess much higher penalties for repeated failures or large employers.
Employer Health Tax (EHT) — Ontario
If your business is in Ontario and your total Ontario payroll exceeds $1,000,000 in a year, you are also responsible for the Employer Health Tax (EHT). Small businesses with payroll under $1,000,000 are exempt. The EHT is filed annually with the Ontario Ministry of Finance.
Personal Liability for Directors
This is the part many first-time employers miss: if your corporation fails to remit payroll source deductions, CRA can pursue the directors personally — even after the company has been closed or gone bankrupt. There is no corporate shield for unremitted source deductions. This makes payroll compliance one of the highest-priority tax obligations for any business.
Independent Contractors vs Employees
If you pay someone as an independent contractor (issuing a T4A instead of a T4), you have no withholding obligation — they handle their own CPP and taxes. However, CRA scrutinizes contractor arrangements closely. If CRA determines that a contractor is actually an employee, you become responsible for all the source deductions you should have withheld, plus penalties and interest.
Use CRA’s “Employee or Self-Employed?” guide (RC4110) to assess the relationship before classifying a worker.
Just hired your first employee and not sure you have everything set up correctly? Book a consultation with us — we will walk you through payroll setup so you stay compliant from day one.