What is net pay?
Net pay is the amount your employee has left over after taxes, benefits, and deductions are removed. This is commonly referred to as an employee's take-home pay.
The employee's net pay can be quite different from the gross pay depending on the amount of taxes, benefits, and other deductions.
Your employee's net pay will depend on how many payroll deductions they have. It's possible to have a combination of mandatory and voluntary payroll deductions.
Mandatory payroll deductions
Mandatory payroll deductions can include:
- Taxes. You are responsible for deducting federal and provincial or territorial income taxes from your employee's pay.
- Employment insurance (EI). Employees pay into EI and can tap into it if they're unable to work due to illness, pregnancy, maternity leave, and other reasons.
- Canada Pension Plan (CPP). Employees also have to pay into the CPP. For those who qualify, the purpose of the CPP is to replace part of the employee's income when they retire.
- Quebec Pension Plan. A mandatory public insurance plan in the province of Quebec. Meant to provide basic financial protection when the employee retires, dies, or becomes disabled.
Note, if you fail to deduct income tax, EI, or CPP from an employee's paycheque, there is a penalty of 10% of the amount you failed to deduct.
Voluntary payroll deductions
After deducting mandatory payroll items, it's time for any voluntary deductions. Voluntary deductions are ones the employee has chosen to have taken off their paycheque. Some examples include:
- Group Registered Retirement Savings Plan (RRSP). You may choose to offer your employees a group RRSP.
- Group benefits. This can include dental and vision care and different types of insurance.
How to calculate net pay
Going back to our salaried worker example, let's say you've negotiated an annual gross salary of $60,000 and bi-monthly paycheques of $2,500.
After adding up your employee pension plan and benefits contributions, taxes, EI, and CPP, you get a total of $700.
Gross pay - taxes and deductions = Net pay
$2,500 (gross pay per paycheque) - $700 (taxes and deductions) = $1,800 net pay.
For the hourly worker making $1,400 per paycheque, let's say taxes and deductions are $400.
$1,400 (gross pay per paycheque) - $400 (taxes and deductions) = $1,000 net pay. This translates to approximately $14 per hour.
$1,000 (net pay) / 70 hours (bi-monthly pay period) =$14.29