How to Calculate Net Pay (With Step by Step Instructions)
Updated November 27, 2022
As a salary-earning employee, it's important to understand the type of pay that you receive. You have probably noticed the term "net pay" on your paycheque, but may be unsure what it entails. Knowing what net pay is and learning how to calculate it on your own can help you better understand your income and manage your finances. In this article, we define net pay and gross pay, explain the difference between the two payments, provide step-by-step instructions on how to calculate net pay, and provide some tips to help employees better understand their pay.
What is net pay?
Net pay, frequently called "take-home pay," refers to the money left over after deductions and expenses have been taken out of your salary. It's gross pay minus mandatory and voluntary deductions. This is the amount that you may see in your bank account. Some examples of deductions and expenses that are typically deducted from your gross pay include:
federal or provincial taxes
Canadian pension plan (CPP)
health savings account
flexible savings account
Note that all of these deductions aren't mandatory. For example, while you must pay federal and provincial taxes, other deductions, such as life insurance or a retirement plan, are voluntary. Depending on the deduction type, you may be able to change the amount to what best suits you. For example, you can decide to have less money deducted from your gross pay for your retirement plan. Remember that when deductions go into various savings accounts, the money is still yours, but it's only accessible under specific circumstances.
What is gross pay?
Gross pay is the full amount of money you receive from your employer. For example, if you earn $80,000 per year from your employer, you have earned $80,000 in gross pay. On a payslip, you may notice that your gross pay is much higher than the listed net pay. This is because it's the full amount you receive before any deductions or expenses are taken out. Your gross pay is often the sum of the following:
your salary or paid wages
any overtime you have accumulated
any bonuses you may receive
What is the difference between net pay and gross pay?
Now that you know what net pay and gross pay are, you can begin to understand the difference. Your gross pay is the figure that you negotiate with your employer. It's the full amount of pay before any deductions or taxes are taken out. Although you agree upon gross pay, you won't actually receive this amount. What you receive is the net pay, which is the gross pay minus any deductions. Net pay may be significantly less than gross pay. Note that often on a payslip, your net pay may appear bolded or in a larger font so that it's easily distinguishable from gross pay.
Remember that when you negotiate a salary with your employer, you agree on the gross pay. You determine the gross pay because your net pay can change each month depending on the deducted amount. For example, taxes may increase or union dues may decrease. While these fluctuations may not affect the gross pay, the net pay increases or decreases accordingly.
How to calculate net pay
Follow these three steps to calculate net pay:
1. Determine your gross pay
To uncover how much net pay you may receive, you first need to determine your gross pay. How you determine your gross pay can vary based on if you receive a set salary or earn hourly wages. There are 3 different ways of determining your gross pay, which include:
Calculating gross pay for salaried employees
As most employees know their yearly salary, you may be able to determine your monthly gross pay by dividing your yearly salary by 12. For example, if your annual salary is $60,000, divide 60,000 by 12, which equals 5,000. This means that you earn $5,000 in gross pay per month.
Calculating gross pay for wage employees
If you are paid hourly wages and work a different number of hours each month, use this equation to uncover your monthly gross pay: pay per hour x hours worked in a particular month = monthly gross income. If you're paid per hour, multiply your hourly pay by the number of hours worked that month, then add any overtime or premiums. For example, if you make $15 per hour and work 130 hours in October, you multiply 15 and 130, which equals 1,950. So your gross pay is $1,950 for October.
Referencing your payslip or contract
If you are unsure of your gross pay, you can often refer to your payslip or your contract, as most employers list it somewhere on these documents. It is often clearly labelled "gross pay" followed by the amount. If you have trouble locating it, you can reach out to your company's human resources department and request this information.
2. Determine the sum of your deductions
Next, you'll find out what deductions may be taken out of your gross pay. These monthly deductions are listed on your paycheque. They may include mandatory and voluntary deductions, such as taxes, health plan expenses, and union dues. Add all of these deductions together to get a sum of your total monthly deductions. For example, $1500 (taxes) + $100 (health plan) + $30 (union dues) = $1,630 (sum of your deductions). Often, your payslip may contain a list of your deductions.
3. Calculate net pay
Once you have determined your gross pay and the sum of your deductions, you can calculate your net pay with a simple equation. To calculate net pay, subtract the sum of your deductions from your gross pay. Use the following equation to calculate your net pay: net pay = gross pay - deduction.
Use your yearly gross pay to determine your monthly gross pay. To find your monthly gross pay, divide your yearly gross pay by 12. For example, if $50,000 is your yearly gross pay, you divide $50,000 by 12 to determine your monthly gross pay, $4,167. Next, subtract the sum of your deductions from your monthly gross pay. If the sum of your deductions is $1,900, subtract $1,900 from $4,167 (monthly gross pay). The difference is $2,267 (your monthly net pay).
How to use net pay and gross pay for filing taxes
When it comes to filing taxes, it's helpful to know your gross pay and net pay, as you may use either figure. For example, if someone asks for your income, you include your gross pay. A lender is more interested in your net pay, as your net pay is the amount that you actually have available in your bank account to use and pay off a loan. Note that the amount of money you may end up owing after filing your tax return can depend on your deductions. For example, if you claim more exemptions, there's a chance that you'll end up owing more money after filing.
Tips for understanding gross pay and net pay
It's important to understand your gross and net payment amounts so you can feel assured that you're receiving the salary you should, deducting the correct amounts out of each paycheque, and verifying the salary you agreed upon with your employer during the hiring process. If you recently joined the workforce, consider asking your hiring manager or assigned human resources representative about your pay so they can explain it better. Doing so can help you feel secure that you're receiving the salary you should.
Here are some resources your employer may provide so you can learn more about pay:
Information session: You may have access to an information session about gross pay and net pay during your onboarding training. If needed, ask for an example of a payslip from your company so you can see what gross pay, deductions, and net pay look like.
Tax forms: Your employer may provide tax forms so you can calculate your tax deductions for upcoming payment periods.
Human Resources: The HR department is there to help you and other employees understand their paycheque and troubleshoot any issues you may see with yours. Make sure to gather their contact information so you can email or telephone if you have any questions.
Now that we have provided step-by-step instructions on how to calculate net pay, you can better understand your pay.
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