Why the Process Matters

Payroll isn’t guesswork — it’s a sequence.
When you follow the same steps every time, you eliminate errors and keep your CRA remittances clean.

There are five essential stages in every pay run:

1. Determine gross pay.
2. Calculate deductions.
3. Calculate employer contributions.
4. Confirm net pay.
5. Record and remit everything properly.

Let’s break down each stage.

1. Determine Gross Pay

Gross pay is the total amount an employee earns before deductions.
It’s based on their wage type (hourly or salary) and any additional earnings.

Example:

• Employee: Hourly, $25/hour
• Hours worked: 80
• Overtime: 5 hours at 1.5× rate

Gross Pay = (80 × $25) + (5 × $37.50) = $2,187.50

If the employee also earned $100 in tips or bonuses, total gross pay becomes $2,287.50.

2. Calculate Deductions

Next, you withhold deductions from gross pay. The three mandatory ones are:

• Income Tax — based on federal and provincial tax tables (use the employee’s TD1 form).
• CPP (Canada Pension Plan) — 5.95% up to the annual maximum.
• EI (Employment Insurance) — 1.66% up to the annual insurable maximum.

Let’s apply these to our example employee with $2,287.50 gross pay:

DeductionRateAmountIncome Tax (approx.)—$320.00CPP5.95%$136.09EI1.66%$37.97Total Deductions—$494.06

3. Calculate Employer Contributions

You also owe the employer share of CPP and EI. These aren’t deducted from the employee — they’re paid by the business.

Employer ContributionRateAmountCPP (match)5.95%$136.09EI (1.4× employee)2.324%$53.16Total Employer Contributions—$189.25

4. Confirm Net Pay

Net pay is what the employee actually receives — gross pay minus deductions.

Net Pay = $2,287.50 − $494.06 = $1,793.44

That’s the amount you’ll deposit into their account.

5. Record and Remit

Once payroll is processed:

• Record gross pay, deductions, and employer portions in your bookkeeping system.
• Remit the deducted amounts plus your employer contributions to the CRA by your due date.
• Update your payroll liability accounts (CPP Payable, EI Payable, Income Tax Payable).

Your remittance for this employee would be:

Remittance TypeAmountIncome Tax$320.00CPP (employee + employer)$272.18EI (employee + employer)$91.13Total Remittance$683.31

That’s the total you’ll send to the CRA for this pay period.

The Shortcut: Payroll Software

While it’s possible to calculate payroll manually, one small rounding error can cause major reconciliation issues.
Tools like Wagepoint, QuickBooks Payroll, and Ceridian Powerpay handle these calculations automatically, using CRA’s current tax tables and remittance rates.

They also:

• Generate pay stubs and T4s automatically.
• Track CPP/EI limits automatically.
• Create audit-ready records.

You can still understand the math — you’re just not stuck doing it by hand.

Common Mistakes to Avoid

• Forgetting to adjust CPP/EI when an employee reaches the annual maximum.
• Skipping taxable benefits in gross pay.
• Failing to record employer contributions in your books.
• Paying net wages but forgetting to remit on time.
• Relying solely on your accountant at year-end — payroll must be tracked in real time.

The Takeaway

Payroll accuracy comes down to process.
When you understand how gross pay becomes net pay — and how to handle your remittances — you gain full control of your labour costs and CRA compliance.

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