Hiring your first employee changes more than your workload. The moment you put someone on payroll, you take on a set of obligations to the CRA that didn’t exist when it was just you and maybe a few contractors: source deductions, remittances, T4 filings, and deadlines that don’t move for anyone. None of it is difficult in isolation, but skipping a step early on has a way of turning into a real headache a year later.
Here’s what actually changes the day you hire, in the order you need to deal with it, and what it costs beyond the number on the offer letter.
Before you issue a single paycheque
A few things need to be in place before your new hire’s first day, not after:
- Open a payroll program account with the CRA under your existing Business Number, if you don’t already have one. This is separate from your GST/HST account, even though it uses the same BN.
- Decide on pay frequency, weekly, biweekly, or monthly, since this affects your remittance schedule.
- Set up workers’ compensation coverage through your provincial board, which is mandatory in most provinces for most industries the moment you have employees.
- Have your new employee complete a TD1 form (federal and provincial) so you know how much tax to withhold from each paycheque.
What has to come off every paycheque
Three deductions are mandatory on nearly every employee paycheque in Canada:
| Deduction | Who pays it |
|---|---|
| Income tax | Employee, withheld and remitted by you |
| Canada Pension Plan (CPP) | Split between employee and employer |
| Employment Insurance (EI) | Employee pays a rate, employer pays 1.4x that rate |
The employer portions of CPP and EI aren’t deducted from the employee’s pay, they’re an additional cost you carry on top of the gross wage. A lot of first-time employers budget only for the salary itself and get caught off guard by this extra cost layered on top, usually adding somewhere around 7-11% beyond gross wages once both are factored in.
Say you’re paying an employee $1,000 gross for a biweekly pay period. Income tax withholding might take out roughly $150-200 depending on the province and their TD1 claims, their CPP share around $55, and their EI share around $17, leaving them with roughly $750-780 in take-home pay. Meanwhile, you’re separately on the hook for a matching $55 in employer CPP and around $24 in employer EI, money that never touches the employee’s paycheque but absolutely leaves your business account.
Payroll remittances are due on a strict schedule, and missing one triggers penalties starting immediately, not after a grace period. Most new employers remit monthly, by the 15th of the following month, though the CRA assigns your specific schedule based on your remittance history and size.
Employee or contractor: getting the classification right
This is one of the most common early mistakes: treating someone as a contractor to skip payroll obligations, when the actual working relationship (set hours, ongoing direction, tools you provide, no ability for them to work for other clients) makes them an employee in the CRA’s eyes regardless of what the invoice says. Misclassification found after the fact means back payroll taxes, penalties, and interest, often stretching back years.
The general test looks at control (do you direct how and when the work happens, or just the outcome), ownership of tools, and financial risk. If in doubt, it’s worth a conversation with an accountant before your first hire rather than after a CRA review flags it.
A concrete example: a bookkeeper who sets her own hours, uses her own software, and works for six other small businesses alongside yours is clearly a contractor. Someone who shows up at your shop five days a week, uses equipment you provide, and only works for you, is an employee even if you’ve both agreed to call the arrangement a contract and pay by invoice. The label on the paperwork doesn’t override the reality of how the work actually happens.
Running payroll yourself versus outsourcing it
Plenty of first-time employers run payroll themselves for a single hire, using payroll software that calculates deductions and generates the remittance amounts automatically. That works fine as long as someone is genuinely keeping up with it every pay period. Where it breaks down is when the business gets busy, payroll gets pushed to “later this week,” and a remittance deadline quietly passes.
A payroll service or bookkeeper handling remittances directly costs money, but it also removes the single most penalty-prone part of running a business from your own to-do list. For a business hiring its second or third employee, that trade usually starts to make sense.
What happens at year-end
Every employee needs a T4 slip by the end of February following the tax year, summarizing their total pay and deductions. You’ll also file a T4 Summary for the business as a whole. Miss the deadline and penalties apply per slip, which adds up fast if you’ve got a team of any size.
For a business with two or three employees, that’s a small filing job. For a business that’s grown to a dozen or more, T4 season becomes a genuine project, and one that goes far more smoothly when payroll records have been kept current all year instead of pieced together retroactively in January.
Reconcile your payroll remittances against your T4 totals before filing, not after. Catching a discrepancy in January is a quick fix. Catching it after the CRA does is a much longer conversation.
Budgeting for the full cost, not just the salary
When you’re deciding whether you can afford to hire, the number to budget against isn’t the salary you’re offering, it’s that salary plus employer CPP and EI, plus workers’ compensation premiums, plus any benefits. A $50,000 salary commonly lands closer to $55,000-$58,000 in total employer cost once everything is added in. Running that full number through your cash flow forecast before extending an offer avoids a nasty surprise three months in.
Beyond the mandatory deductions, factor in the less obvious costs too: onboarding time, any equipment or software licences a new hire needs, and the ramp-up period where they’re being paid but not yet fully productive. None of these show up on a CRA remittance form, but they’re real cash going out before that hire starts paying for themselves.
Getting the paperwork right from day one
Payroll is one area where “I’ll figure it out as I go” gets expensive fast, since errors compound with interest and penalties rather than just needing a correction. If you haven’t settled how you’re paying yourself as the owner alongside your new employee’s payroll, our guide on how to pay yourself as a small business owner in Canada covers that side of the equation.
And once payroll adds a new layer of complexity to your books, keeping everything reconciled monthly matters even more. Nikmani’s plans scale from simple invoicing on the free tier up to full cash flow forecasting, so your books can grow alongside your team instead of needing a system overhaul the moment you hire.
Hiring well is a growth milestone worth celebrating. Just make sure the paperwork behind it is solid enough that it stays something to celebrate a year later, rather than a CRA letter you weren’t expecting.