Chapter 5: Net Pay

5.3 Calculating Net Pay for Various Scenarios

5.3.1 How to Calculate Net Pay for Various Scenarios

Two examples of net pay calculations are provided below. Calculations involving current year rates are not complete, but formulas are provided. Replace placeholders with current year rates (see Chapter 4 for links) to complete the calculations.

5.3.1.1 Scenario 1: Salary Plus Commission

Amrita is a sales professional in Ontario and earns an annual salary of $40,000 plus commission. She is paid weekly. This pay period, she has earned $245 in commissions. Amrita’s employer provides her with a car allowance of $200 per month (not based on the CRA’s “reasonable rate” guidelines). Her employer also pays her monthly life insurance premium of $300. Amrita is not unionized. She contributes $5,000 per year to a registered pension plan through her employer. She also pays $12.20 per week for health and dental benefits.

Calculate Amrita’s net pay for this pay period.

Steps for Calculating Net Pay

Determinations and Calculations

Verify and gather payroll-related information

Determine employee information

Basic deduction amounts (Claim Code 1)

No information to the contrary

Determine pay information

Salary, paid weekly (52 pay periods per year)

$40,000/52 weeks = $769.23 per week

Commission: Varies; $245 this week

     Determine taxable benefits

Life insurance premiums = $300/month

($300 × 12 months)/52 weeks = $69.23 per week

Determine taxable and non-taxable allowances

Taxable: Car allowance (not based on CRA’s reasonable rates) = $200/month

($200 × 12 months)/52 weeks = $46.15 per week

Non-taxable: None

Determine if deductions (other than source deductions) must be made

Yes – Pension Plan, Health and Dental

Pension Plan = $5,000 per year/52 weeks = $96.15/week

Health and Dental = $12.20 per week

Calculate gross earnings

Gross Earnings = Salary + Commission (for the pay period)

Gross Earnings = $769.23 + $245.00 = $1,014.23

Determine pensionable earnings and calculate employee CPP contribution

Calculate pensionable earnings

Pensionable Earnings = Gross Earnings + Taxable Benefits + Allowances

Pensionable Earnings = $ 1,014.23 + $69.23 + $46.15 = $1,129.61

Calculate employee CPP contribution

 CPP Contribution = CPP Rate × ($1,060.38 – (Exemption/52 weeks))

Determine insurable earnings and calculate employee EI premium

Calculate insurable earnings

Insurable Earnings = Gross Earnings + Cash Taxable Benefits and Allowances (car allowance)

Insurable Earnings = $1,014.23 + $46.15 = $1,060.38

Calculate employee EI premium

Employee EI Premium = EI Rate × $1,060.38

Determine gross taxable earnings, net taxable earnings, and income tax deductions

Gross taxable earnings

Gross Taxable Earnings = Gross Earnings + Taxable Benefits + Allowances

Gross Taxable Earnings = $1,014.23 + $69.23 + $46.15 = $1,129.61

Calculate net taxable earnings

Subtract $5,000 per year pension plan contribution

$5,000/52 weeks = $96.15

Net Taxable Earnings = Pensionable Earnings – Yearly Pension Contribution

Net Taxable Earnings = $1,129.61 – $96.15 = $1,033.46

Calculate income taxes

Use PDOC or tax tables

Calculate total deductions

Total Deductions = Total Source Deductions + Other Deductions

Total source deductions

Total Source Deductions = EI Premium Deduction + CPP Contribution Deduction + Federal Income Tax Deduction + Provincial Income Tax Deduction

Other deductions

Other Deductions = Pension Plan + Health and Dental Benefits

Other Deductions = $96.15 + $12.20 = $108.35

Calculate net pay

Net Pay = (Gross earnings – Deductions) + Non-taxable Benefits and Allowances

Gross earnings minus deductions

Gross Earnings Minus Deductions = (Gross Earnings + Taxable Benefits and Allowances) – Total Deductions

Add in non-taxable benefits and allowances

Add in any non-taxable benefits and allowances that should appear on the employee’s net pay but do not impact the above calculations.

In this instance, there are none, so this step is not applicable.

5.3.1.2 Scenario 2: Hourly Wage

Danilo is a unionized construction worker in Alberta and earns an hourly wage of $25. He is paid biweekly. In the current pay period, Danilo worked for 10 days: 80 regular hours and 10 overtime hours, earning time and a half for overtime. Additionally, Danilo is entitled to two weeks of vacation pay (80 hours) at his regular rate. Danilo did not take vacation time, and under the terms of his collective agreement, his vacation entitlement must be paid out this pay period. Danilo’s employer provides him with a daily meal allowance of $15, which is non-taxable. However, Danilo is responsible for his own transportation expenses when travelling between construction sites. He is also enrolled in the company’s health and dental benefits plan, which costs him $75 per month. Union dues are $260 per year.

Calculate Danilo’s net pay for this pay period.

Gross Earnings Minus Deductions = (Gross Earnings + Taxable Benefits and Allowances) – Total Deductions

Steps to Calculate Net Pay

Determinations/Calculations

Verify and gather payroll-related information

Determine employee information

Basic deduction amounts (Claim Code 1)

No information to the contrary

Determine pay information

Wages, paid biweekly (26 pay periods per year)

$25 per hour

Overtime rate: 1.5 × $25/hour

Vacation pay: 80 hours × $25/hour

Determine taxable benefits

None

Determine taxable and non-taxable allowances

Taxable: None

Non-taxable: $15/day meal allowance

Determine if deductions (other than source deductions) must be made

Yes – Health and Dental

Health and Dental = ($75/month × 12)/26 pay periods = $34.62 per pay period

Calculate gross earnings

Gross Earnings = Wage + Overtime + Vacation Pay

Gross Earnings = ($25 × 80 hours) + (10 hours × $25 × 1.5) + ($25 × 80 hours) = $4,375

Determine pensionable earnings and calculate employee CPP contribution

Calculate pensionable earnings

Pensionable Earnings = Gross Earnings + Taxable Benefits + Allowances

Pensionable Earnings = $4,375

Calculate employee CPP contribution

CPP Contribution = CPP Rate × ($4,375 – (exemption/26 pay periods))

Determine insurable earnings and calculate employee EI premium

Calculate insurable earnings

Insurable Earnings = Gross Earnings + Cash Taxable Benefits and Allowances

Insurable Earnings = $4,375 + $0 (no taxable benefits or allowances)

Calculate employee EI premium

Employee EI Premium = EI Rate × $4,375

Determine gross taxable earnings, net taxable earnings, and income tax deductions

Gross taxable earnings

Gross Taxable Earnings = Gross Earnings + Taxable Benefits + Allowances

Gross Taxable Earnings = $4,375 + $0 (no taxable benefits or allowances)

Calculate net taxable earnings

Subtract $260 per year union dues

Union Dues = $260/26 pay periods = $10

Net Taxable Earnings = Gross Taxable Earnings – Union Dues

Net Taxable Earnings = $4,375 – $10 = $4,365

Calculate income taxes

Use PDOC or tax tables

Calculate total deductions

Total Deductions = Total Source Deductions + Other Deductions

Total source deductions

Total Source Deductions = EI Premium Deduction + CPP Contribution Deduction + Federal Income Tax Deduction + Provincial Income Tax Deduction

Other deductions

Other Deductions = Union Dues + Health and Dental Benefits

Other Deductions = $10 + $34.62 = $44.62

Calculate net pay

Net Pay = (Gross earnings – Deductions) + Non-taxable Benefits and Allowances

Add in non-taxable benefits and allowances

Add in any non-taxable benefits and allowances that should appear on the employee’s net pay but do not impact the above calculations.

In this instance, $15/day meal allowance × 10 days = $150

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