Payroll Deductions in Ontario: A Small Business Guide
March 9, 2026
The moment you hire your first employee, you become responsible for payroll deductions. That means calculating and withholding the right amounts from each paycheque, matching certain contributions as the employer, and remitting everything to the CRA on time. Get it wrong and the penalties are steep — and they come with personal liability.This guide covers how payroll deductions work in Ontario, what you owe as an employer, and how to stay on the right side of the CRA.
What Are Payroll Deductions?
Payroll deductions are amounts withheld from an employee's gross pay before they receive their net (take-home) pay. In Canada, there are three mandatory deductions:
As an employer, you are responsible for calculating these amounts, deducting them from each pay, and remitting them to the CRA along with your employer portions.
Canada Pension Plan (CPP)
How It Works
Both the employee and employer contribute to CPP. The rates and maximums are set annually by the CRA.
For 2026, the key figures are:
| CPP Detail | Amount | |---|---| | Employee contribution rate | 5.95% | | Employer contribution rate | 5.95% (matching) | | Annual maximum pensionable earnings | $71,300 | | Basic exemption | $3,500 | | Maximum annual employee contribution | $4,034.10 |
You deduct CPP from every paycheque based on the employee's pensionable earnings minus the pro-rated basic exemption. As the employer, you match the employee's contribution dollar for dollar.
CPP2 (Second Ceiling)
Starting in 2024, the CRA introduced CPP2 — a second earnings ceiling. For 2026, earnings between $71,300 and $81,200 are subject to an additional 4% contribution from both the employee and employer. This only applies once the employee has hit the first CPP maximum.
Who Is Exempt
Self-employed individuals pay both the employee and employer portions. Employees under 18 or over 70 are exempt from CPP. Workers in Quebec contribute to the Quebec Pension Plan (QPP) instead.
Employment Insurance (EI)
How It Works
EI premiums are split between employee and employer, but not equally. The employer pays 1.4 times the employee's contribution.
For 2026:
| EI Detail | Amount | |---|---| | Employee premium rate | 1.64% | | Employer premium rate | 2.296% (1.4x employee rate) | | Maximum insurable earnings | $65,700 | | Maximum annual employee premium | $1,077.48 | | Maximum annual employer premium | $1,508.47 |
You deduct EI from every paycheque until the employee reaches the annual maximum. Some employers qualify for a reduced EI rate if they provide a qualifying short-term disability plan — check with the CRA.
Income Tax Withholding
How It Works
You withhold federal and provincial income tax from each paycheque based on the employee's TD1 form (federal and provincial Personal Tax Credits Return). Every employee should fill out a TD1 when they start working for you.
The amount you withhold depends on:
Ontario has a progressive income tax system. Combined federal and provincial rates for 2026 range from approximately 20.05% on the first $57,375 of taxable income to over 53% on income above $250,000.
How to Calculate
Use the CRA's Payroll Deductions Online Calculator (PDOC) or the payroll tables published in the T4032 guide for Ontario. Most payroll software (QuickBooks, Wagepoint, ADP, Ceridian) calculates these amounts automatically.
Do not try to calculate income tax withholding manually. The formula accounts for federal and provincial brackets, surtaxes, and credits. Use the CRA tools or your payroll software.
Employer vs. Employee: Who Pays What
This is where many new employers in Sault Ste. Marie get confused. Here is the breakdown:
| Deduction | Employee Pays | Employer Pays | |---|---|---| | CPP | 5.95% of pensionable earnings | 5.95% (matching) | | CPP2 | 4% on second ceiling earnings | 4% (matching) | | EI | 1.64% of insurable earnings | 2.296% (1.4x employee rate) | | Income tax | Based on TD1 and earnings | Nothing (you withhold, not contribute) | | WSIB | Nothing (in Ontario) | 100% employer-funded | | EHT | Nothing | Applies if Ontario payroll exceeds $1 million |
As a general rule of thumb, budget an additional 12% to 15% on top of each employee's gross salary to cover your employer contributions and WSIB premiums.
Remittance Schedules
You must remit all deductions (employee and employer portions) to the CRA on a regular schedule. Your remittance frequency depends on your average monthly withholding amount (AMWA):
| AMWA | Remittance Frequency | Due Date | |---|---|---| | Under $3,000 | Quarterly | 15th of the month after the quarter ends | | $3,000 to $24,999.99 | Monthly | 15th of the following month | | $25,000 to $99,999.99 | Up to twice monthly | 25th and 10th | | $100,000+ | Up to 4 times monthly | 3rd working day after pay period |
Most small businesses in Northern Ontario remit monthly. If you are a new employer, you start with monthly remittances until the CRA assigns you a different frequency based on your history.
How to Remit
Never miss a remittance. The CRA charges 3% for amounts 1 to 3 days late, 5% for 4 to 5 days, 7% for 6 to 7 days, and 10% for more than 7 days late or more than one failure in a calendar year.
T4s and Year-End Filing
By February 28 each year, you must:
T4 filing is done electronically through the CRA's Web Forms application or through your payroll software. If you have more than 50 employees, electronic filing is mandatory.
Records of Employment (ROE)
When an employee stops working for you — whether they quit, are laid off, or their hours drop below a certain threshold — you must issue a Record of Employment (ROE). This is required for the employee to apply for EI benefits.
ROEs must be filed within 5 calendar days of the employee's last day of work (for electronic filing, which is the standard). The CRA takes ROE compliance seriously, and Service Canada cross-references ROE data with EI claims.
Common Payroll Mistakes
Misclassifying Workers
Calling someone an "independent contractor" when they are really an employee does not remove your payroll obligations. The CRA looks at the actual working relationship — control, tools, financial risk, and opportunity for profit. If a worker is found to be an employee, you owe back CPP, EI, and income tax plus penalties and interest.
This is a common issue in Northern Ontario, particularly in construction, trades, and seasonal work. When in doubt, review the CRA's guidelines or get a ruling.
Missing the Basic Exemption
CPP has a $3,500 annual basic exemption. Some employers forget to apply this, resulting in over-deduction. Your payroll software should handle this automatically, but verify it.
Not Updating TD1 Forms
Employees should submit new TD1 forms when their personal situation changes (marriage, new dependants, additional income). If you are using outdated TD1 information, you may be withholding too much or too little tax.
Forgetting Taxable Benefits
If you provide employees with non-cash benefits — a company vehicle, health spending account, or employer-paid group benefits (for life insurance above $25,000) — some of these have taxable benefit implications that must be included on the T4.
Frequently Asked Questions
How do I set up a payroll account with the CRA?
Register for a payroll account through CRA My Business Account or by calling 1-800-959-5525. You will receive a 15-digit account number (your business number plus "RP0001"). Do this before your first pay run.
Can I run payroll myself or do I need a service?
You can run payroll yourself using the CRA's PDOC calculator and manual remittances. However, most Sault Ste. Marie business owners find that the time and compliance risk make a payroll service or professional bookkeeper well worth the cost. A single error can result in penalties that far exceed the cost of the service.
What is WSIB and do I need it?
The Workplace Safety and Insurance Board (WSIB) provides workplace injury insurance in Ontario. Most employers with employees are required to register and pay premiums. Rates vary by industry — construction and trades pay higher rates than office-based businesses. WSIB premiums are 100% employer-funded.
How do payroll deductions work for part-time employees?
The same rules apply. CPP, EI, and income tax are calculated based on the employee's actual earnings per pay period, regardless of whether they work full-time or part-time. The annual maximums still apply.
What happens if I cannot afford to remit on time?
Contact the CRA immediately. They may arrange a payment plan, but penalties still apply. Payroll remittances carry personal liability — if your corporation fails to remit, the CRA can pursue directors personally. This is one debt you cannot walk away from.
Get Payroll Right From the Start
Payroll is one of the most regulated areas of running a business, and the penalties for non-compliance are among the harshest. The best approach is to set up proper systems from your first hire and keep them running consistently.
Fusion Financial provides payroll services for small businesses across Sault Ste. Marie and Northern Ontario. Whether you need full payroll processing, help with T4s, or just want to make sure your current setup is compliant, reach out to us or request a quote.