What is Net Pay?
Net pay, or “take-home” pay is the final amount you receive from your employer after deductions.
Some deductions are mandatory while others are voluntary.
Mandatory deductions include federal tax, provincial tax, Canada Pension Plan, and Employment Insurance.
The amount taken off your pay depends on your earnings, deduction limits, and your region.
Voluntary deductions may include any of the following costs, and others.
They’re deductions for programs you’ve agreed to participate in such as:
- Pension plan
- Group insurance plan
- Registered Retirement savings plan
- Union or professional dues
- Uniforms or job equipment
- Your portion of a discount program for public transit, parking, or gym facilities
How Do You Calculate Net Pay?
Canada Revenue Agency offers an online calculator for federal, provincial, and territorial tax, EI, and CPP deductions in all provinces and territories, except Quebec.
Quebec residents should use their provincial government’s calculator here.
For the purposes of this article, we’re providing a rough example of the deductions for an Ontario employee who earns $60,000 annually in the 2020 tax year.
This example assumes the employee does not make any voluntary deductions.
|Federal Tax deductions||-$6,887|
|Provincial Tax deductions||-$3,514|
If your employer deducts other amounts on your behalf for any of the voluntary deductions mentioned above, you will need to contact your HR department for an estimate.
This amount will further reduce your income calculation from the CRA or Quebec government website.
What is Gross Pay?
Gross pay is the total amount of money an employer offers you for the time you work.
It includes your regular hours or your agreed salary amount, plus overtime, bonuses, and reimbursements paid by the employer for out-of-pocket employee expenses.
It does not include mandatory or voluntary deductions.
How Do You Calculate Gross Pay?
Gross pay calculations depend on how you are paid.
For instance, if you are an hourly employee, you calculate your hours worked and multiply them by your hourly rate and then add any overtime or premiums paid by your employer.
Here’s an example:
|Weekly Hours Worked||40|
|Hourly Rate||$17||$680.00 (40 x $17.00)|
|Weekly Overtime Worked||5|
|Overtime Rate (x 1.5)||$25.50||$127.50 (5 x $25.50)|
Salaried employees can calculate their gross pay each pay period by dividing their annual salary by the number of pay periods in the year.
Here are a few examples:
|Annual Salary||Pay Periods Per Year||Gross Pay||Calculation|
-mid & end of month)
Net Pay vs. Gross Pay
Gross pay is what you earn through your employer before deductions.
Deductions include mandatory amounts for taxes, CPP, and EI and any voluntary deductions your employer makes on your behalf.
The amount remaining after all mandatory and voluntary withholdings is your net pay.
It is the final amount on your pay cheque.
Consequently, it also known as take-home pay, because it is what you can actually spend.
Differences For Employees
Gross pay is often the amount an employer refers to when they offer you a job.
This might be a set salary amount or your hourly wage and it is also the amount you’ll see in your employment contract.
However, this isn’t the amount of money you take home.
Your employer is obliged to deduct taxes, CPP, and EI.
They will also deduct money from your pay if you choose to include yourself in certain offerings.
These may include a company pension or insurance plan and other perks.
When negotiating with an employer, it is more realistic to use your net income since this is what you’ll actually put in the bank.
Gross pay may sound impressive, but it doesn’t provide you with an accurate sense of your true earnings.
Did You Know?
The concept of “time value of money” states money is always worth more now than later. If you have the option to get paid sooner, rather than later, take it. You can put your money to work for you, instead of your employer using it interest-free.
Differences For Employers
Gross pay is an employer’s overall cost for an employee.
It’s what they’re willing to pay for an individual with the skills and experience the business needs.
How the employer decides to pay the employee is equally important.
Mandatory and voluntary employee deductions are complicated and time-consuming calculations.
Consequently, more pay periods throughout the year lead to higher expenses and an increased chance of errors.
If you intend to pay your employees often, the time and effort involved should be calculated into gross pay offerings.
Frequently Asked Questions
- Is net pay what you get from your paycheck?
- Yes, net pay is the amount you receive after all mandatory and voluntary deductions. It is also known as “take-home” pay.
- How do I calculate my net pay?
- Net pay equals your gross pay less your mandatory and voluntary deductions.
If you are a salaried employee and want to calculate your net pay for a week, divide your net annual salary by the number of weeks you work in the year.
If you are an hourly employee and want to calculate your net hourly wage, divide your net weekly income by the hours worked in the week.