Table of Contents
- 1. Misclassifying Employees vs. Independent Contractors
- 2. Incorrect Tax Withholdings and Remittances
- 3. Missing Payroll Deadlines and CRA Remittance Dates
- 4. Errors in Calculating Overtime Pay
- 5. How to Calculate Vacation Pay in Ontario Correctly
- 6. Inadequate Record-Keeping and Documentation
- 7. Failing to File Records of Employment (ROEs)
- 8. CPP and EI Contribution Errors
- Frequently Asked Questions
Last Updated: October 2, 2026
1. Misclassifying Employees vs. Independent Contractors
Understanding the 10 common payroll mistakes to avoid in Ontario starts with recognizing that the line between employee and independent contractor is blurrier than most business owners think, and misclassification is one of the most expensive of these mistakes.
An employee works under your control and direction. You set their hours, provide tools and training, and they work exclusively or primarily for your business. An independent contractor controls how, when, and where they work.
The problem: many businesses hire people as contractors to save on payroll processing costs, only to face CRA audits that reclassify them as employees. Once that happens, you owe CPP contributions, EI premiums, and income tax withholdings retroactively, often for years of unpaid amounts.
Misclassification isn’t just an administrative error. CRA can assess penalties of up to 20% of unpaid source deductions, plus interest compounded daily. For a business with even one misclassified worker over two years, this can easily exceed several thousand dollars.
How to get it right: Document the nature of the working relationship. If someone works set hours, uses your equipment, receives training from you, or is integrated into your team structure, they’re an employee. If they invoice you, work for other clients, provide their own tools, and have flexibility in how they deliver the work, they’re likely a contractor. When in doubt, consult with a payroll specialist or accountant who understands Ontario Employment Standards Act rules.
2. Incorrect Tax Withholdings and Remittances
Source deductions, income tax, CPP, and EI, must be withheld from employee paycheques and remitted to CRA on schedule. Errors here are common and costly. Many small business owners either withhold too little (creating a shortfall when CRA audits) or too much (tying up cash unnecessarily).
The calculation depends on the employee’s gross pay, province of residence, and personal tax credits claimed on their TD1 form. Miss an update to tax tables, and your withholdings fall out of sync with CRA requirements.
Remittance deadlines matter just as much as the amounts. If your payroll is under $15,000 per month, you remit monthly by the 15th of the following month. Larger payrolls require twice-monthly remittances.
Set up CRA My Account reminders or calendar alerts for your remittance deadline. Many payroll software platforms (QuickBooks Payroll, Wagepoint, Employment Hero) flag remittance dates automatically and can file electronically, reducing the risk of missed deadlines.
What to do: Verify your employees’ TD1 forms annually. Update tax rates each January when CRA releases new withholding tables. If you use payroll software, ensure it’s configured for your payroll frequency and remittance schedule. If you process payroll manually, double-check calculations against CRA’s online payroll deduction calculator. HK Accounting handles source deductions and remittances on schedule.
3. Missing Payroll Deadlines and CRA Remittance Dates
Payroll deadlines in Ontario are non-negotiable. Miss them, and CRA treats it as non-compliance, triggering penalties and interest that compound quickly.
Remittance deadlines depend on your payroll size:
- Monthly payroll (under $15,000/month): remit by the 15th of the following month
- Twice-monthly payroll (over $15,000/month): remit twice monthly (typically the 10th and 25th)
Records of Employment (ROEs) must be filed within five days of an employee’s last day of work.
Many businesses operate without a formal filing calendar. Payroll gets processed, but nobody tracks when source deductions are due or when year-end forms must be filed.
Businesses with five or more employees, or those processing payroll in-house without backup systems. A filing calendar prevents missed deadlines and keeps compliance on track.
What to do: Create a payroll filing calendar that lists every deadline for the year: remittance dates, ROE filing dates, T4 filing dates, WSIB reporting dates, and Employer Health Tax deadlines. Many payroll platforms include this automatically. If you’re managing payroll manually, use a spreadsheet or project management tool to track dates. HK Accounting maintains a filing calendar for every client.
4. Errors in Calculating Overtime Pay
Overtime rules in Ontario are specific, and miscalculating overtime pay is a common mistake that creates liability.
The error usually happens in one of two places: either the business doesn’t track hours accurately, or it calculates overtime on gross pay instead of regular hourly rate.
Another trap: misunderstanding exemptions. Managers, supervisors, and certain professional roles may be exempt from overtime rules under the Employment Standards Act.
How to calculate it correctly:
- Track all hours worked each week (including unpaid breaks)
- Identify hours over 44 per week as overtime
- Calculate the employee’s regular hourly rate (gross pay ÷ hours worked, excluding overtime)
- Pay overtime hours at 1.5x the regular rate
- If hours exceed 48 per week, pay those hours at 2x the regular rate
Overtime underpayment claims can be filed years after the fact. If an employee discovers they were underpaid overtime, they can pursue back pay through the Ministry of Labour or small claims court. The cost of a single claim often exceeds what proper payroll administration would have cost.
What to do: Use payroll software that calculates overtime automatically based on Ontario rules. If processing manually, create a simple spreadsheet that flags hours over 44 per week. Review payroll reports monthly to catch errors before they compound. When in doubt about whether a role is exempt, consult the Ministry of Labour’s guidelines or a payroll specialist.
5. How to Calculate Vacation Pay in Ontario Correctly
Vacation pay in Ontario is calculated as 4% of gross wages earned in the previous 12 months (or 6% for employees with 5+ years of service).
Gross wages include salary, commissions, bonuses, and shift differentials, everything except statutory holiday pay. If an employee earned $50,000 in gross wages over 12 months, their vacation pay is $2,000 (4%) or $3,000 (6% if applicable).
Many businesses make the mistake of paying vacation pay only when the employee actually takes time off.
How to calculate and track it:
| Calculation Step | Example |
|---|---|
| Gross wages earned (12 months) | $50,000 |
| Vacation pay percentage | 4% |
| Annual vacation pay owed | $2,000 |
| Accrual per biweekly paycheque | $76.92 |
| Paid out when employee takes time | As requested or lump sum at year-end |
Set up a vacation pay accrual account in your accounting software. Track it per employee so you know exactly what you owe at any time. When an employee takes vacation, deduct the accrued amount from this account. This prevents surprises at year-end and reduces disputes.
What to do: Review your vacation pay calculation method. If you’re paying it out only when taken, switch to accruing it on each paycheque. Verify that you’re calculating on gross wages, not net. If you’re unsure whether an employee qualifies for the 6% rate (5+ years of service), check their hire date and update calculations accordingly.
6. Inadequate Record-Keeping and Documentation
CRA expects payroll records to be maintained for at least six years. Many small businesses keep minimal records, making it impossible to defend themselves during an audit. Poor record-keeping also makes it harder to spot errors before they become problems.
Records should include: gross pay, deductions (tax, CPP, EI), net pay, hours worked, vacation accrual, statutory holiday pay, and any adjustments or corrections.
Beyond compliance, good records help you manage cash flow, track labour costs, and identify payroll errors quickly.
What to do: If you’re using payroll software, most platforms store records automatically.
7. Failing to File Records of Employment (ROEs)
An ROE must be filed within five days of an employee’s last day of work.
Many businesses miss this deadline because they don’t have a system for tracking separations.
Filing a late ROE triggers a CRA penalty. More importantly, it delays the employee’s ability to access EI benefits, creating a negative experience and potential disputes.
What to do: Create a checklist for employee separations. When someone leaves, immediately document their last day and reason for separation.
8. CPP and EI Contribution Errors
CPP (Canada Pension Plan) and EI (Employment Insurance) contributions are employer responsibilities, and errors here are surprisingly common.
EI contributions have a maximum insurable earnings threshold.
Both CPP and EI rates change annually. CRA publishes updated rates and thresholds each January.
CPP and EI errors are often discovered during CRA audits or when employees review their Notice of Assessment. Back-calculated contributions, plus interest and penalties, can be substantial. For a business with multiple employees, even small per-employee errors add up quickly.
What to do: Verify your payroll software is configured with current CPP and EI rates and thresholds. If you process payroll manually, update your calculation spreadsheet each January using CRA’s published rates. Monitor employee earnings to ensure EI stops being deducted once the maximum is reached. If you’ve made errors in previous years, contact CRA to discuss adjustment options, voluntary disclosure may reduce penalties.
HK Accounting handles payroll processing, source deductions, remittances, and compliance filings for small and mid-sized businesses across the Greater Toronto Area.
Frequently Asked Questions
What are the most common payroll mistakes small businesses make in Ontario?
The most frequent payroll mistakes include misclassifying workers as independent contractors instead of employees, calculating overtime incorrectly, missing CRA remittance deadlines, and failing to withhold the correct tax amounts. Vacation pay calculation errors and inadequate record-keeping also rank high. These errors often stem from confusion about the Ontario Employment Standards Act requirements or simply not having the right payroll systems in place. Small business owners juggling multiple responsibilities frequently overlook compliance details until a CRA letter arrives.
How do I correct a payroll error after it’s been processed?
First, identify the error and calculate the adjustment needed. If the error affected net pay, issue a correcting cheque or adjustment on the next pay run and document it clearly. For tax withholding errors, adjust future deductions or remit the shortfall to CRA immediately. If the error appears on a T4 slip already filed, you must file a T4 amendment with CRA. Always keep detailed records of what went wrong, when you discovered it, and how you fixed it. Prompt correction demonstrates good faith and reduces penalty exposure.
How long does an employer have to correct a paycheck error under the Ontario Employment Standards Act?
The Employment Standards Act requires that employees be paid all wages owing. While there is no specific grace period, employers must correct errors without undue delay. Best practice is to correct paycheck errors on the next scheduled pay period. For errors that underpaid an employee, CRA expects correction to happen immediately to avoid interest and penalties on unpaid source deductions. Documented, timely corrections protect your business from both employee claims and CRA enforcement action.
What is the difference between an employee and an independent contractor for payroll purposes?
An employee receives regular wages, has source deductions withheld, and qualifies for CPP, EI, and statutory benefits like vacation pay and statutory holidays. An independent contractor is responsible for their own taxes, does not receive benefits, and is not covered by employment standards. CRA looks at control (who sets hours and methods), ownership of tools, financial risk, and integration into the business. Misclassifying an employee as a contractor exposes you to back payroll taxes, penalties, and interest. When in doubt, treat the worker as an employee.
What are the penalties for payroll compliance errors in Ontario?
Penalties vary by violation type. Late or incorrect source deduction remittances incur interest plus a penalty of up to 20% of the unpaid amount. Failure to file T4 slips or Records of Employment can result in penalties of $25 to $500 per form. Misclassifying workers can trigger back payroll taxes plus interest and penalties. The Ontario Ministry of Labour can also issue orders requiring correction and impose administrative penalties. The longer an error goes unaddressed, the higher the financial exposure. Early detection and correction are far less costly than CRA enforcement.