There are different ways employees get paid their wages in Canada. And understanding these methods is vital as it will help you estimate how much your take-home pay is when you receive a paycheque. The most prominent among these payment methods are net pay and gross pay.
Although these payment terms might be confusing to new employees, some might assume that the salary amount on their contract is the actual money they will receive in their account once paid.
The constituents of worker’s compensation include basic salary, allowance, bonus, and deductions. This article will be reviewing net pay vs. gross pay in Canada and the difference between both payment terms.
What is Net Pay?
Net pay is the total amount of pay an employee receives on their payday after deductions are taken out. It is also known as net wages or net income and is used to determine an employee’s federal and provincial non-refundable credits or any social benefits.
These deductions include tax, retirement contributions, etc. Employees working in the same position might receive the same gross pay but different net pay. It is circumstances such as tax credits, marriage, and other reasons that result in variation of take-home pay.
Below is the equation used for the calculation of net pay:
Gross pay – payroll tax – other deductions = Net pay
The payroll tax and deductions mentioned above include the Federal tax deduction, Provincial tax deduction, CPP deduction, and EI deduction which is usually deducted before the employee receives payment and forwarded to the government.
For instance, if you make $52,000 a year in Ontario, Canada, you will be taxed $11,432 annually. Here’s a breakdown:
Gross Salary = $52,000
Federal tax deduction = $5,185
Provincial tax deduction = $2,783
CPP deduction = $2,643
EI deduction = $822
Total tax = $11,432
Net pay = $40,568
That means that your annual net pay will be $40,568, or $3,381 per month. Your average tax rate will be 22.0% and your marginal tax rate, 35.3%.
The marginal tax rate means that any additional income will be taxed at this rate. For instance, an increase of $100 in your salary will be taxed $35.27, so, your net pay will only increase by $64.73.
The actual amount might vary depending on your employer or the nature of your job. For instance, a contract staff might receive more money in form of vacation pay. An employee might also choose to contribute to an RRSP account.
Using this method, the employee can see how their net income is generated. Once all deductions are removed, the balance is the money an employee receives each month as salary.
However, if you are not an employee and own a business, your net pay is computed differently. The cost of running the company will be subtracted from the gross income and no other deductions for business owners. These costs include:
- Cost of the product sold
- Any loan or borrowed interest
- Employee gross salaries.
- Administrative costs.
- Any business-related purchases
What is Gross Pay?
Gross pay is the total earning an employee gets within a duration before any deductions are made. It includes bonuses, overtime and holiday pay, and others like rent allowance, special allowance, and conveyance allowance. Gross pay is calculated as follows:
Gross pay = net pay + taxes and deductions
Some of the components of gross pay include:
- Salary arrears
- Overtime payment
- Performance-related cash awards
- Fuel charges and water.
- Travel, medical and leave allowance, etc.
The following items are not included in a gross pay:
- Refreshments and snacks by the employer during work hours
- Travel compensation for official/business purposes
- Food expenses for official/business purposes
Gross Pay Deductions
The deductions from gross pay are as follows:
- Federal and provincial income or payroll taxes
- Health insurance
- Employment insurance
- Canadian pension plan (CPP)
For daily wage employees, it is better to calculate the gross income at the end of the year. It makes it easier to locate the entire gross earning achieved that particular year.
An employee can withdraw their money in the following circumstances:
- Termination of service
- Retirement due to incurable disease or disabilities
- Relocation of the employee overseas.
Net Pay vs. Gross Pay
On a paycheque, you might see two different numbers – the net pay and gross pay. Your gross income will appear higher than net pay. Generally, net pay is lesser than the gross salary.
Gross pay is the amount you negotiate and finalize at the initial stage of your job employment. It is the amount that appears in your contract.
On the other hand, net pay is the amount that will be available after taxes and deductions.
While one is your basic salary after deductions, the other includes bonuses and compensations. You can easily identify them on your paycheque by checking the more significant number for gross income and the smaller number for net income. However, if the employee’s salary falls below the government salary tax limit, gross pay becomes equal to net income.
Bear in mind that both gross and net pay are crucial parts of your finances that influence your taxes and budget. It is advisable to learn and understand how they work to prepare for a financially stable future.