Common Payroll Mistakes Small Businesses Make and How to Avoid Them

Payroll might seem straightforward, but even small mistakes can lead to big headaches for business owners—like fines, penalties, or unhappy employees. For small businesses in Canada, it’s crucial to understand the most common payroll pitfalls and how to prevent them.

Here’s a look at the most frequent payroll mistakes and actionable tips for avoiding them.

1. Misclassifying Employees and Contractors

One of the biggest payroll errors is classifying a worker incorrectly. In Canada, the CRA distinguishes between employees and independent contractors, and the rules affect payroll deductions, CPP contributions, and EI premiums.

Tip: Review each worker’s role and relationship to your business. If in doubt, consult the CRA’s guidelines or speak with an accountant to avoid costly reclassifications or penalties.

2. Incorrect Payroll Deductions

Payroll deductions for income tax, Canada Pension Plan (CPP), and Employment Insurance (EI) are mandatory for employees. Failing to deduct the correct amounts, or submitting them late, can lead to CRA penalties.

Tip: Use payroll software that calculates deductions automatically, and double-check updates for tax rates, CPP, and EI annually. Staying organized throughout the year minimizes errors and last-minute stress.

3. Late or Missed Payroll Remittances

Even if you calculate payroll correctly, failing to remit deductions and employer contributions on time is a common issue. CRA deadlines vary depending on your remittance schedule, and missing them can result in interest and fines.

Tip: Set up automatic reminders or recurring payments to ensure timely remittance. Some businesses find outsourcing payroll to a professional or using cloud payroll software reduces errors and ensures compliance.

4. Not Keeping Accurate Records

Payroll records aren’t just for filing taxes—they’re legal requirements. The CRA expects businesses to keep documentation for at least six years, including:

• Employee information and T4 slips

• Wage and hour records

• Payroll remittance receipts

Tip: Keep digital and physical backups organized by employee and year. This makes audits easier and protects your business in case of disputes or CRA reviews.

5. Forgetting Benefits and Deductions

Employee benefits, like pensions, health plans, or group insurance, must be accounted for in payroll. Forgetting to track deductions for these benefits or miscalculating taxable benefits can create discrepancies and trigger CRA scrutiny.

Tip: Maintain a clear record of all benefit contributions and taxable perks. Update payroll software or your accounting system whenever benefit policies change.

6. Ignoring Payroll Updates

Tax rates, CPP, EI, and other regulations change regularly. Small businesses sometimes stick to outdated rates or processes, which can result in errors or penalties.

Tip: Review payroll rules annually—or at the start of the year—to ensure you’re using current rates. Subscribing to CRA updates or consulting your accountant can keep you informed and compliant.

Stay on Top of Payroll and Protect Your Business

Payroll errors can be costly, stressful, and time-consuming, but most are preventable with proper planning, organization, and the right tools. 

Need help managing payroll and staying compliant in 2026? Our accounting team can streamline your payroll processes, ensure accuracy, and save you time—contact us today to get started.