Law firm payroll: partners, associates, and staff run on three different rails

Partner draws are not payroll — stop running them through it

An equity partner is not an employee of the partnership. Their income is an allocation of partnership profit reported on a T5013 slip; the monthly amounts they take are draws against that allocation, not wages. No T4, no CPP or EI withholding, no income tax at source — partners cover their own tax through instalments and pay both halves of CPP as self-employed earners on their T1.

The error usually arrives with a new bookkeeper who adds the partners to Wagepoint to make the monthly amounts look tidy. Unwinding it means amended slips and CPP corrections, so we set the boundary in the chart of accounts itself: draws post to equity, never to salary expense. One nuance worth naming — many people with "partner" on the door are income partners without an equity stake, and they are usually employees with a T4 like any associate.

A sole practitioner with a professional corporation sits on a different rail again: the PC pays the lawyer a salary or dividends as a shareholder-employee. Ontario law PCs allow only licensees as shareholders, so the family-dividend planning other professions use is off the table — a spouse doing real firm administration on payroll at a market wage is the channel that remains.

The people who do belong on payroll

Associates, law clerks, legal assistants, and admin staff are employees: T4s, CPP, EI, and income tax at source, with an ROE on every departure. Two firm-specific rules sit on top. Payroll is funded from the general account only — trust money exists for client matters, and LSO trust accounting leaves no room for a payroll run that touches it, even briefly. And contract lawyers who take overflow files for several firms, set their own hours, and bill per matter are genuine contractors: T4A box 048, often with HST you recover as an input tax credit. An "independent" associate who works only for you, on your files, under your supervision is an employee whatever the retainer agreement says.

Articling students are employees from day one

An articling student is on payroll: TD1 forms at onboarding, CPP and EI withheld, a T4 in February, and an ROE when the term ends — even when a hire-back offer is already signed. The same applies to summer students. Firms sometimes float the idea of paying a student as a contractor to simplify a ten-month term; the working reality of articling — your files, your supervision, your hours — makes that position indefensible, and the retroactive CPP and EI land on the firm.

Bonuses: structure them, then watch the 180-day clock

Billable-hour thresholds, origination credit, and year-end discretionary bonuses all run through payroll with tax and CPP withheld — the bonus method of withholding stops a December bonus from being shredded by a one-off spike in tax tables. The timing rule matters more: a bonus accrued at year-end is deductible in that year only if it is paid within 180 days of the fiscal year-end. Miss the window and the deduction slides to the year of payment. We diarize the 180th day for every accrued bonus, partner-approved or not, because a missed date quietly moves real money between fiscal years.

Ontario adds the Employer Health Tax once payroll clears the $1 million exemption — a threshold mid-size firms cross earlier than they expect as associate salaries climb. And when US clients pay the firm, that is a billing and withholding question rather than a payroll one; our cross-border tax guide for lawyers covers W-8 forms, treaty relief, and the Reg 105 mirror image. For the recurring machinery — pay runs, remittances by the 15th, T4 and T5013 season — we run firms on fixed-fee payroll connected to their trust-compliant books.

Source: CRA — T4001, Employers' Guide: Payroll Deductions and Remittances.