What is Gross and Net Pay: An Exhaustive Guide for Canadian Businesses

When managing payroll for your business, two of the most crucial terms you’ll encounter are “gross pay” and “net pay.” The difference between these two figures can significantly impact both your employees’ financial well-being and your company’s payroll management. In this post, we’ll delve deep into the nuances of both terms, offering Canadian businesses and employees a clear understanding of what is gross and net pay.

What is Gross Pay

Definition of Gross Pay
Gross pay refers to the total amount of money an employee earns before any taxes, benefits, and other payroll deductions are subtracted. When employers discuss salaries with prospective employees, they typically refer to gross pay. It’s the figure you’ll often see posted with job advertisements, such as “$50,000 per annum” or “$30 per hour.”

Check out our post on the difference in pay frequencies for more information on how gross pay is calculated.

Calculating Gross Pay

For Salaried Employees:
For employees on a fixed salary, gross pay is determined by dividing their annual salary by the number of pay periods in the year.

Example: If an employee has a yearly salary of C$60,000 and is paid monthly, their gross pay per month would be C$5,000.

For Hourly Workers:
For those earning an hourly wage, the gross pay is calculated by multiplying their hourly rate by the total hours worked during a specific pay period.

Example: If an employee works 40 hours a week at C$20 an hour, their weekly gross pay would amount to C$800.

Factors that Affect Gross Pay

Apart from the standard salary or hourly wage, certain elements can influence an employee’s gross pay:

Bonuses: One-time payments awarded for performance.
Commissions: Payments based on sales or services rendered.
Overtime: Typically, a higher rate is paid for hours worked beyond the standard workweek.

What is Net Pay

Definition of Net Pay
Net pay, otherwise known as “take-home pay,” is the amount of money employees receive after all deductions, like taxes and benefits, have been subtracted from their gross pay. It’s the actual amount that appears on an employee’s paycheck.

Factors Influencing Net Pay

Federal and Provincial Income Taxes: The amount deducted varies based on an individual’s tax bracket, which progressively increases based on income.
Canada Pension Plan (CPP) and Employment Insurance (EI): Both employer and employee contribute to these programs.
Health and Dental Insurance: Premiums employees pay towards their coverage.
Retirement Contributions: Like contributions to a Registered Retirement Savings Plan (RRSP).
Wage Garnishments: Court-ordered deductions, which might arise from debts like unpaid taxes or child support.
Union Dues: For employees part of a union.

Check out the various deductions from gross pay on our blog.

Calculating Net Pay

To determine net pay:

Start with the gross pay (either the salary divided by pay periods or hourly rate times hours worked).
Subtract any pre-tax deductions like specific retirement contributions.
Deduct federal and provincial taxes.
Subtract post-tax deductions like health insurance premiums, wage garnishments, or union dues.

Or, you could use a free online payroll calculator – like the one offered by PayEvo. Our tool is fast to use, straightforward, and spares you the mental math. Check it out below: