Understanding the difference between gross pay and net pay is necessary when it comes to understanding how much money you take home when you receive a paycheque. The differences between these two common terms are often confusing to those who are starting a new job or are new to the workforce. It is not uncommon for people to make the assumption that the salary number in their contract is the amount of money they will receive in their bank accounts once paid.
In this article, we provide more details about what gross income is, what it means for your monthly and annual income and how to properly calculate your income when looking at gross salary.
What is gross pay?
Gross pay is the total amount of money an employee receives before taxes and deductions are taken out. For example, when an employer pays you an annual salary of $40,000 per year, this means you have earned $40,000 in gross pay.
Understanding gross pay vs. net pay
On a paycheque, you may notice two different numbers: gross pay, and net pay, which is the amount of money you actually receive. Whether you earn a salary or hourly wages, it is common to see these two different numbers on a pay statement, with your gross pay appearing as the higher of the two numbers.
Gross pay is the amount your employer pays you based on your agreed-upon salary or an hourly wage. This is usually the amount of money offered in your initial conversations or the number you negotiated for. This is also the number that is seen in your contract. For example, if your employer agreed to pay you $15 per hour and you work for 30 hours during a pay period, your gross pay will be $450.
Net pay is the amount of money that will finally be available to you. Using the last example, if you earned $450 in gross pay, your net pay will be the amount that ends up in your bank account after taxes and other fees have been taken out.
If you are a salaried employee, this may be complicated even further. For example, if your employer agreed to pay you $45,000 a year with bi-monthly pay periods, your gross pay would be $1875, which is $45,000 divided by 24 (the amount of pay periods).
In this example, your net pay would be the amount left over after taxes and other fees are deducted from your gross pay of $1875.
In most cases, your net pay appears in a larger font on your paycheque or pay statement and is often bolded to appear darker so that you can easily distinguish it from your gross pay.
Deductions from gross pay
The reason your gross pay is always higher than your net pay is due to some mandatory and voluntary deductions from your employer and potentially due to choices you have made about savings or benefits.
Required deductions can include but are not limited to:
- Federal and provincial income or payroll taxes
- Health insurance
- Employment insurance (EI)
- Canadian pension plan (CPP)
Your employer may make additional voluntary deductions from your paycheque for other reasons. These can include but are not limited to pension plans, equipment and uniforms necessary for your job and union dues. These are voluntary in the sense that they are not federally mandated, but you may not have an option to opt out of them under your employment contract.
On your payslip, you may also see deductions for your health plan, Canadian pension plan (CPP), health savings account, flexible savings account or other benefits if your employer offers these. Some employers may choose to cover the cost of health insurance plans, wellness plans or do registered retirement savings plan (RRSP) matching. Other employers will have you pay for these deductions through your paycheque. As mentioned above, these can be voluntary or involuntary deductions depending on the employer or industry that you work in.
Some organisations may offer payment plans through your salary. For example, if your employer offers a discounted rate for public transit, parking, or the use of gym facilities. If you choose to take part in these types of programs, the fees are deducted from your gross pay as well.
Deductions related to savings mean that the money is still yours but is being placed in an account you may only be able to access under certain circumstances or by paying a tax penalty. The amount of these deductions is typically something you personally determine when you are making benefit selections. Your company's HR team may be able to answer any questions you have regarding these choices.
How to calculate gross income
To calculate your gross income, refer to your most recent pay statement. How you calculate gross income will vary depending on whether you receive a salary or hourly wage. There are several online calculators available to help you understand your gross pay. You will need to know your pay cycle to aid in this calculation. For example, are you paid twice a month, bi-weekly or weekly? Understanding this will help you calculate your gross income.
Here is how to calculate gross income for salaried and wage employees:
Calculating gross income for salaried employees
The salary included on the contract you and your employer signed when you started will be your official gross pay. You may also be able to calculate gross income based on your regular pay statements. For example, if you receive $5,000 per month in gross pay from your employer, you can do a simple calculation ($5,000 x 12 months) to get your gross income of $60,000.
However, there's a chance you could earn other income from your employer, such as through bonuses. If you've received bonuses in addition to your salary, you will need to include the full amount you received before taxes in bonuses when you calculate your gross salary amount.
It's important to add the gross bonus amount to your gross salary because bonuses are often taxed at a different rate than regular income.
For example, if your employer agrees to pay you $60,000 per year without bonuses, that will be your gross income. However, if you receive a $5,000 bonus this year, it will be taxed at a different rate depending on if this is your first bonus in a given year. Your regular salary will have either a lower or higher tax rate, depending on how you file your taxes. So your gross pay will be $65,000 including bonuses, but your net pay might be a bit more complicated to calculate. When it comes to understanding how bonuses impact your gross pay, consider contacting an accredited accountant to see how this will impact your yearly taxes.
Calculating gross income for wage employees
If you earn hourly wages and you aren't sure of how many hours you'll work annually, it may be easiest to calculate your gross income at the end of the year. Once you receive your last pay statement, you will be able to locate the entire gross earnings you made during that year.
However, if you do receive regular and guaranteed hours from your employer, you can calculate your weekly, monthly or yearly gross income rather easily. Simply multiply the number of hours you receive each week by the total amount you earn in an hour.
For example, if you earn $18 per hour with a guaranteed 35 hours of work per week, you will have gross weekly wages of $630, gross monthly income of about $2,520 and gross annual pay of about $30,240 per year.
If your employer does not provide paid time off, remember that your gross pay will decline if you take any days off. If you receive a raise at any point in the year, adjust your calculation to account for the increase in hourly pay.