Common Payroll Mistakes: How to Avoid Costly Payroll Errors

Payroll errors may seem small, but they can quickly lead to CRA penalties, employee dissatisfaction, and hours of correction work. Understanding the most common payroll mistakes — and how to fix them — helps keep your business compliant and your staff happy.

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Payroll Mistakes That Small Businesses Make Most Often

• Using outdated tax rates or TD1 forms → causes wrong income tax deductions.

• Incorrect CPP or EI calculations → forgetting to apply yearly contribution limits.

• Missing CRA remittance deadlines → results in penalties and interest charges.

• Misclassifying employees and contractors → leads to unpaid deductions or compliance issues.

• Forgetting vacation pay or overtime → creates back-pay claims from employees.

• Entering wrong employee details (e.g., SIN, start date) → leads to year-end reporting errors.

• Poor record-keeping → missing documents during audits or T4 preparation.

• Failing to issue or correct T4 slips properly → affects employee tax filings and causes CRA fines.

• Not reviewing YTD totals regularly → increases risk of unnoticed errors throughout the year.

• Skipping payroll reconciliation → totals don’t match between bank payments and CRA reports.

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1. Incorrect Tax Calculations

One of the most frequent payroll mistakes is miscalculating federal or provincial income tax. This often happens when employers use outdated TD1 forms or forget to apply current tax tables. Using the wrong tax credits or pay frequency in calculations can lead to employees being under- or overtaxed.
➡️ How to fix it: Always use the CRA’s Payroll Deductions Online Calculator (PDOC) for each pay period. It automatically applies the correct 2025 tax rates.

2. Wrong CPP or EI Contributions

Many employers miscalculate Canada Pension Plan (CPP) and Employment Insurance (EI) amounts. Common payroll errors include forgetting the annual CPP/EI limits or not stopping deductions once an employee reaches the yearly maximum.
➡️ Why it matters: Over-deducting means you owe employees refunds; under-deducting can trigger CRA audits.
➡️ Prevention tip: Track year-to-date CPP and EI contributions in a spreadsheet that caps deductions automatically.

3. Late Source Deduction Remittance

Another major payroll error is paying CRA remittances late. Depending on your remitter type, deadlines can be monthly or semi-monthly. Missing them even by one day may lead to penalties and daily interest.
➡️ Prevention tip: Set reminders in your accounting calendar or automate CRA payments through your bank.

4. Misclassifying Employees and Contractors

Many small businesses mistakenly classify a worker as an independent contractor when they legally count as an employee. This leads to unpaid CPP, EI, and tax deductions.
➡️ Why it matters: CRA may reclassify the worker and charge you for unpaid contributions plus interest and penalties.
➡️ How to avoid it: Review the CRA’s “employee vs. contractor” checklist — it’s based on control, ownership of tools, and risk of profit/loss.

5. Missing Vacation Pay or Overtime

It’s common to forget to include vacation pay, statutory holidays, or overtime hours when processing payroll manually.
➡️ Why it matters: Employees may file complaints with provincial labour boards, and you’ll need to issue back pay.
➡️ Solution: Track total worked hours and vacation accrual in your payroll sheet or use time-tracking software that syncs with payroll.

6. Incorrect Employee Data

Small details like the wrong SIN number, outdated address, or incorrect start date can create major T4 mismatches at year-end.
➡️ Fix it fast: Review employee information every few months and make sure TD1 and contact info are up to date.

7. Poor Record-Keeping

Without proper records, it’s almost impossible to verify past payments, deductions, or CRA remittances. Many businesses fail to keep copies of PDOC reports, remittance receipts, or T4 data.
➡️ Why it matters: CRA requires payroll records to be stored for at least six years. Missing records can lead to compliance issues.
➡️ Best practice: Keep a digital payroll folder for each employee — including TD1 forms, pay registers, and remittance confirmations.

8. Failing to Issue or Correct T4s Properly

Incorrect totals on T4 slips are one of the most overlooked payroll errors. Employers sometimes forget to include taxable benefits or misreport CPP/EI amounts.
➡️ Result: Employees may get wrong tax returns, and CRA may issue a penalty for incorrect or late T4s.
➡️ Fix: Use your year-to-date register to verify all totals before filing, and correct any mistakes with an amended T4 if needed.

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• Personal Tax Filing 
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What to Do If You Make a Mistake on Payroll

Mistakes happen — what matters is correcting them quickly and properly.

1. Identify and document the error.
   Review your payroll records and determine exactly what went wrong (e.g., wrong tax rate, missed payment, duplicate entry).

2. Recalculate accurate amounts.
   Use the CRA’s Payroll Deductions Online Calculator (PDOC) to recalculate correct tax, CPP, and EI deductions.

3. Communicate with your employee.
   Be transparent. Explain the issue and confirm if additional pay or deduction adjustments are needed in the next payroll.

4. Adjust your CRA remittance.
   If overpaid or underpaid, adjust in your next remittance cycle or contact CRA to request a correction.

5. Update your year-to-date records.
   Make sure your YTD totals and T4 data reflect the corrected figures.

Quick action helps you stay compliant and builds trust with your employees.

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• Financial Service BC 
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Avoid Payroll Mistakes with Professional Payroll Services

If payroll feels overwhelming, you’re not alone. Managing deductions, remittances, and CRA filings manually can take hours every month.

Our professional payroll services simplify the process for Canadian small businesses by:

• Automating CPP, EI, and tax calculations

• Handling CRA remittances and T4 filings

• Providing accurate pay runs and direct deposits

• Offering expert support when regulations change

Let our team handle the numbers while you focus on growing your business.

Get a free consultation today and discover how much time and stress you can save by outsourcing payroll management.

FAQ

1. What happens if I make a payroll error?
You can correct the error in your next pay run or file an adjustment with CRA. Keep proper records of the correction.

2. Can payroll mistakes affect employees’ taxes?
Yes. Incorrect deductions or late filings may impact their T4s or tax refunds, so it’s important to fix mistakes quickly.

3. How can I reduce payroll errors?
Use up-to-date CRA tools, double-check PDOC calculations, and maintain organized records.

4. Is payroll software necessary?
Not always. Small businesses with few employees can manage payroll manually for free, but software helps reduce human error.

5. How often should payroll be reviewed?
Review every pay run and perform a detailed audit each quarter to ensure compliance.