Become an insider!
Get our latest payroll and small business articles sent straight to your inbox.
If the thought of calculating the correct pay for your employees is making your palms sweaty, you’re not alone. As a business owner, gross pay versus net pay calculations might feel like payroll Armageddon (especially when there’s a calculation SNAFU). Not to mention, you also need to be able to explain these calculations clearly to employees who come to you with questions about their pay.
Canadian businesses need to factor in a lot of different deductions for their employees, such as Canada Pension Plan (CPP), Registered Retirement Savings Plans (RRSP), Employment Insurance (EI), taxes and a range of voluntary contributions that employees might want to make. And, you guessed it, each of these factor into the difference between gross pay and net pay.
In this article, we’re looking at the ins and outs of gross pay versus net pay from a payroll perspective, so you can consistently give your employees the payments they expect (and stay out of trouble with the government).
What is gross pay?
Gross pay is the total amount of money that an employee has earned for the work they’ve done for you over a certain time period. This amount might include salary or wages, overtime pay, bonuses and other types of compensation.
For example: When you see a job advertisement that lists the annual salary amount as $70,000, that’s the gross salary pay amount.
As an employer, it’s important to note that the gross pay amount does not include your employer contributions for things like CPP and EI in Canada.
What is net pay?
Net pay is often called “take home pay,” as it’s what your employees receive after you’ve deducted income tax and other deductions and contributions from their wages. This is the amount that’ll appear in an employee’s bank account at every pay cycle.
For this calculation, you’ll need to know what an employee’s gross pay is for a specific period, how much the income tax will be over the same period, and the amount you need to factor in for any non-tax deductions.
A simple formula is:
Gross Pay – Deductions = Net Pay
Some common deductions that might need to be factored into net pay calculations include:
- Federal or provincial taxes
- Canada Pension Plan (CPP)
- Employment Insurance (EI)
- Health/dental plans
- Registered Retirement Savings Plans
- Child support payments
As a small business owner, you’ll need to factor in statutory deductions for employees, together with voluntary deductions that an employee might choose to make. It’s best to begin your calculations with the voluntary deductions.
Voluntary deductions are taken from net pay after CPP, EI and income tax are calculated. They are not deducted from the gross pay amount.
For example, your employees might choose to:
- Buy things from your workplace (e.g. meals or uniform items)
- Contribute to a Registered Retirement Savings Plan (RRSP)
The tricky thing to remember with voluntary deductions is that, well, they’re voluntary. Your employees can choose whether or not they want these amounts deducted from each pay or only occasionally.
It’s important to have a good system in place to ensure employees can let you know their voluntary deductions if they need to and that any changes they request are calculated before the next payroll.
While we all quietly grumble about paying this statutory tax, it’s necessary for the government to provide our communities with the things we value, such as functional infrastructure, good healthcare and quality education.
Employment Insurance (EI)
Another deduction you’ll need to factor in is Employment Insurance. If your employees lose their job, this insurance fund will give them temporary support while they look for work.
EI can also assist employees who are:
- Caring for a newborn
- Seriously ill
- Caring for a family member
Canada Pension Plan (CPP)
The CPP (or QPP if you’re in Québec) is a government program that allows employees to save up for retirement over time. As an employer, you’ll contribute an amount that’s equal to every CPP contribution made by your employees.
This is a point that often leads to payroll mistakes, as many employers don’t realize what they pay should match what the employee pays. This can cause a lot of confusion when more money goes out than expected.
For example: If an employee contributes $200 per month to CPP, you’ll need to match this contribution and pay $200 a month as well. The total amount remitted to the government will be $400.
How are gross pay and net pay related to payroll?
From an employer standpoint, gross pay refers to the total earnings you owe to each employee before any deductions. The employer portion of statutory deductions like EI and CPP aren’t part of the gross pay amount.
As every employee will have different circumstances and differing voluntary deduction amounts, it’s important that you have all the information you need to make each individual net pay calculation and accurately run your payroll.
Employee pay stubs
It’s legislatively required for employers to provide employees with exactly how their net pay has been calculated. In other words, you need to give them a pay stub whether it’s paper or paperless.
Due to changing deductibles, bonuses or overtime, net pay might vary from one payday to the next, so it’s important that your employees have a good understanding about how much was taken out of their gross pay and where those amounts went.
On many pay slips, the net pay amount is bolded to clearly show the final amount that’ll be deposited in their bank account.
If you use Wagepoint, your employees can simply log into their employee portal to get a breakdown of all their net pay calculations for every pay period.
Wagepoint also takes care of payroll remittances. This enables you to deduct and submit the required amounts from employee wages to the Canada Revenue Agency (CRA) as part of your tax obligations. We’ll automatically send these to the CRA and Revenu Québec (RQ) based on your remittance frequency.
However you choose to provide pay stubs, make sure there’s a clear breakdown of the gross to net pay calculations for your employees at every pay cycle.
What happens if you make a mistake on your calculations?
Getting net pay right can be a significant cause of grey hairs for small business owners, especially if you’re still doing everything manually. It’s all too easy to hit the wrong button on a calculator or accidentally type an extra figure into a spreadsheet.
If you underpay an employee, you’ll need to let them know and pay them the difference quickly. Your employees rely on their wages for living costs, and they depend on you to get these payment amounts right.
And then there are possible overpayments. Depending on where your business is located in Canada, you might be entitled to simply deduct the overpayment from an employee’s next pay, but provincial laws may require you to take different steps.
In addition to doing careful math, you’ll need to ensure you stay up to date on tax rate and regulation changes at both a federal and provincial level.
If you miss an important update, your business can face potential consequences such as penalties and audits — both of which can cost you a significant amount of time and money (and a few more of those grey hairs).
Calculating gross pay for different types of employees.
Canadian legislation for calculating gross pay can be complicated. Plus, it can vary from province to province and can also differ depending on employer and employee circumstances.
It’s important your calculations are accurate to save you spending years hours on the phone to the Canadian Revenue Agency to report a mistake, or facing fines and penalties during tax time.
Here’s a quick overview of how to calculate gross pay for your salaried and hourly employees.
Employees on a salary
Gross pay is the annual amount of salary you agree to pay an employee when you hire them, divided by the number of annual pay periods for your business.
For example: If you agree to pay Tom $84,000 per year, and you pay him once a month, his gross pay will be $7,000.
If an employee is entitled to any additional pay, such as commissions, overtime or bonuses, you’ll need to calculate this amount and add it to the gross pay for the pay period before making deductions for net pay.
Employees on an hourly rate
If you are working with employees who are paid an hourly rate, you’ll need to follow these steps:
- Determine the number of hours your employee has worked in a pay period.
- Multiply the number of hours they’ve worked by their hourly rate.
- If they’ve worked overtime, multiply the overtime hours by their overtime pay rate.
- Add their hourly pay and overtime pay together to get their gross pay amount.
For example: Francine gets paid weekly and works 40 hours a week at a rate of $25 per hour. Last week she also worked five hours of overtime.
Her gross pay calculation for last week will be:
Weekly pay: 40 x 25 = $1,000
Overtime pay (at $37.50 per hour): 5 x $37.50 = $187.50
Gross pay amount: $1,000 + $187.50 = $1,187.50
Pro tips for navigating gross pay to net pay as an employer.
Communicate with your employees
As a small business owner, clear, ongoing communication with your employees about taxes and payments is crucial to avoid payroll mistakes, awkward conversations, refunds and possible legal issues.
Streamline your payroll process
Payroll can be a pain. There, we said it. But these days, there are plenty of smart solutions for small businesses who are looking to simplify and automate this process.
Using cloud-based payroll software, like Wagepoint, allows you to easily input and approve payment data.
Our software was designed with small businesses in mind. We know exactly how confusing it can be trying to figure out gross pay versus net pay. And we know there’s a million other things you’d rather be doing.
Wagepoint calculations are designed to match the Canada Revenue Agency payroll calculator — meaning your employees will always be paid the right amount when keyed in correctly.
And if your employees are on salary with no changes or adjustments? Your payroll can pretty much run itself with the auto-run feature.
From major legislative changes down to simple tax form updates, the need to keep on your toes as a small business owner is an ongoing one.
We recommend checking out the Canada Revenue Agency website regularly to ensure you’re up to date with any legislative changes.
You should also keep an eye on information that relates to:
- The Income Tax Act
- Income tax regulations
- Insurable Earnings and Collections of Premiums regulations
- The Employers’ Guide to Payroll Deductions and Remittances
Gross pay vs net pay post-match breakdown.
Knowing the difference between gross pay versus net pay is one of the essential parts of running payroll for small business owners.
Always remember that gross pay is the total amount you owe to an employee for a specific time period. After you subtract taxes, statutory government contributions, and voluntary payments, you’re left with net pay.
Learning these differences, and understanding the extra employer contributions you need to pay for things like EI and CPP, will help you stay compliant with regulations and avoid any sticky payroll-related issues.
At Wagepoint, we’ve made it simple for small business owners to manage payroll. Start your free trial to get started.