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.
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Steps for Calculating Net Pay |
Determinations and Calculations |
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Verify and gather payroll-related information |
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Determine employee information |
Basic deduction amounts (Claim Code 1) No information to the contrary |
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Determine pay information |
Salary, paid weekly (52 pay periods per year) $40,000/52 weeks = $769.23 per week Commission: Varies; $245 this week |
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Determine taxable benefits |
Life insurance premiums = $300/month ($300 × 12 months)/52 weeks = $69.23 per week |
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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 |
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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 |
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Calculate gross earnings |
Gross Earnings = Salary + Commission (for the pay period) Gross Earnings = $769.23 + $245.00 = $1,014.23 |
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Determine pensionable earnings and calculate employee CPP contribution |
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Calculate pensionable earnings |
Pensionable Earnings = Gross Earnings + Taxable Benefits + Allowances Pensionable Earnings = $ 1,014.23 + $69.23 + $46.15 = $1,129.61 |
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Calculate employee CPP contribution |
CPP Contribution = CPP Rate × ($1,060.38 – (Exemption/52 weeks)) |
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Determine insurable earnings and calculate employee EI premium |
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Calculate insurable earnings |
Insurable Earnings = Gross Earnings + Cash Taxable Benefits and Allowances (car allowance) Insurable Earnings = $1,014.23 + $46.15 = $1,060.38 |
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Calculate employee EI premium |
Employee EI Premium = EI Rate × $1,060.38 |
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Determine gross taxable earnings, net taxable earnings, and income tax deductions |
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Gross taxable earnings |
Gross Taxable Earnings = Gross Earnings + Taxable Benefits + Allowances Gross Taxable Earnings = $1,014.23 + $69.23 + $46.15 = $1,129.61 |
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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 |
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Calculate income taxes |
Use PDOC or tax tables |
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Calculate total deductions |
Total Deductions = Total Source Deductions + Other Deductions |
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Total source deductions |
Total Source Deductions = EI Premium Deduction + CPP Contribution Deduction + Federal Income Tax Deduction + Provincial Income Tax Deduction |
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Other deductions |
Other Deductions = Pension Plan + Health and Dental Benefits Other Deductions = $96.15 + $12.20 = $108.35 |
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Calculate net pay |
Net Pay = (Gross earnings – Deductions) + Non-taxable Benefits and Allowances |
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Gross earnings minus deductions |
Gross Earnings Minus Deductions = (Gross Earnings + Taxable Benefits and Allowances) – Total Deductions |
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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
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Steps to Calculate Net Pay |
Determinations/Calculations |
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Verify and gather payroll-related information |
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Determine employee information |
Basic deduction amounts (Claim Code 1) No information to the contrary |
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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 |
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Determine taxable benefits |
None |
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Determine taxable and non-taxable allowances |
Taxable: None Non-taxable: $15/day meal allowance |
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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 |
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Calculate gross earnings |
Gross Earnings = Wage + Overtime + Vacation Pay Gross Earnings = ($25 × 80 hours) + (10 hours × $25 × 1.5) + ($25 × 80 hours) = $4,375 |
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Determine pensionable earnings and calculate employee CPP contribution |
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Calculate pensionable earnings |
Pensionable Earnings = Gross Earnings + Taxable Benefits + Allowances Pensionable Earnings = $4,375 |
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Calculate employee CPP contribution |
CPP Contribution = CPP Rate × ($4,375 – (exemption/26 pay periods)) |
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Determine insurable earnings and calculate employee EI premium |
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Calculate insurable earnings |
Insurable Earnings = Gross Earnings + Cash Taxable Benefits and Allowances Insurable Earnings = $4,375 + $0 (no taxable benefits or allowances) |
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Calculate employee EI premium |
Employee EI Premium = EI Rate × $4,375 |
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Determine gross taxable earnings, net taxable earnings, and income tax deductions |
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Gross taxable earnings |
Gross Taxable Earnings = Gross Earnings + Taxable Benefits + Allowances Gross Taxable Earnings = $4,375 + $0 (no taxable benefits or allowances) |
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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 |
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Calculate income taxes |
Use PDOC or tax tables |
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Calculate total deductions |
Total Deductions = Total Source Deductions + Other Deductions |
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Total source deductions |
Total Source Deductions = EI Premium Deduction + CPP Contribution Deduction + Federal Income Tax Deduction + Provincial Income Tax Deduction |
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Other deductions |
Other Deductions = Union Dues + Health and Dental Benefits Other Deductions = $10 + $34.62 = $44.62 |
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Calculate net pay |
Net Pay = (Gross earnings – Deductions) + Non-taxable Benefits and Allowances |
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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 |
