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Payroll

Gross pay vs net pay: What's the difference?


Key Takeaways

  • To properly manage your business's payroll and finances, it's important to understand how gross and net pay differ.

  • Gross pay represents the amount an employee earns before subtracting any taxes or deductions.

  • Net pay is the amount your employee has left over after subtracting taxes, benefits, and deductions.


  • The main difference between gross pay vs net pay is that gross pay represents the amount an employee receives before taxes and deductions, and net pay is what's left after.

    To properly manage your business's payroll and finances, it's important to understand how gross and net pay differ. Clear knowledge of the terms can also help you answer employee questions about their paycheques.

    Here's everything you need to know about gross pay vs net pay.

    What is gross pay?

    Gross pay represents the amount an employee earns before any taxes or deductions are removed. The gross pay is the wage or salary you negotiate with a potential employee when you're hiring.

    Gross pay also includes any additional income your employee may have earned such as overtime, commissions, or bonuses.

    How to calculate gross pay

    Let's say you have a salaried employee who earns $60,000 per year and you pay bi-monthly (twice per month). This means your employee makes $60,000 per year in gross income, which is $5,000 per month, or $2,500 per pay period in gross pay.

    $60,000 / 24 pay periods = $2,500 gross per paycheque

    If you pay your employees every week, simply divide their annual salary by 52.

    $60,000 / 52 pay periods = $1,154 gross per paycheque

    If you have an hourly worker that you pay $20 per hour, and they work 35 hours per week, they make $700 per week or $1,400 per pay period in gross pay.

    $20 x 35 hours = $700 per week

    $700 x 2 = $1,400 bi-monthly

    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

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    Why understanding gross pay vs net pay is important

    For employers

    • Employee education. If an employee comes to you with questions about their paycheque, it's important you have the knowledge to answer them.
    • Compliance. Knowing the difference between gross and net pay and how to properly manage mandatory deductions can help to ensure you are compliant with government regulations.

    For employees

    • Salary negotiations. When you understand the difference between gross pay vs net pay, this can put you in a better position to negotiate your wage when taking on a new job. If a company offers you $60,000, this might sound reasonable, but what does it look like after taxes and deductions? Does it still sound like enough money?
    • Financial planning. Knowing how much money you take home with each paycheque can help you budget accordingly. If you think you're working with your gross salary, only to discover your take-home pay is much lower, this can mess up your budget.  


    The difference between gross pay vs net pay

    While gross pay and net pay are terms that are often confused, there is a big difference. Your employee's gross pay is the salary or hourly rate they agree to before any taxes, benefits, or other items are removed. Net pay is what's left over after taxes and deductions, commonly referred to as "take-home pay."

    Once you understand the two terms and how to calculate each, you can perform manual calculations for payroll. To save time and effort, you can check out QuickBooks Online Payroll solutions. 

    Frequently asked questions

    Disclaimer

    Money movement services are provided by Intuit Canada Payments Inc.

    This content is for information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by region, province, state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Intuit does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit does not warrant that the material contained herein will continue to be accurate nor that it is completely free of errors when published. Readers should verify statements before relying on them.

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    A person sitting on a couch smiling at the camera
    Jessica (Jones) Martel
    Jessica is a freelance writer, professional researcher, and mother of two rambunctious little boys. She specializes in personal finance, women and money, and financial literacy. Jessica is fascinated by the psychology of money and what drives people to make important financial decisions. She holds a master of science degree in cognitive research psychology and bachelor's degrees in communications and psychology. Her work has been published on Investopedia, The Balance, Borrowell, Money Under 30, Time.com, Seeking Alpha, ConsumerAffairs, and more.

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