Gross pay is what employees earn before taxes, benefits and other payroll deductions are withheld from their wages. The amount remaining after all withholdings are accounted for is net pay. Employers familar with these terms are often better equipped to negotiate salaries with workers and run payroll effectively.

What is gross pay?

As previously mentioned, gross pay is earned wages before payroll deductions. Employers use this figure when discussing compensation with employees, i.e. $60,000 per year or $30 per hour. Gross pay is also usually referenced in Federal and Provincial income tax brackets.

Calculating gross pay

Calculating gross wages depends on how employees are paid. For salaried employees, gross pay equals annual salary divided by the number of pay periods per year (see chart below). So, if someone makes $48,000 annually and is paid monthly, the gross pay will be $4,000.

To calculate gross pay for hourly workers, multiply the hourly rate by the hours worked during a pay period. For example, a part-time employee who works 35 hours at $12 per hour will have a gross pay of $420. Overtime rates must also be accounted for, if applicable.

Calculating gross income

To calculate gross income, multiply the employee’s gross pay by the number of pay periods (see chart above). For instance, if someone is paid $900 per week and works every week in a year, the gross income would be $46,800 per year.

Net pay

The compensation employees get to take home depends on various payroll deductions, some of which may be voluntary, whereas others are mandatory.

What affects net pay?

The following deductions impact net pay:

  • Pretax contributions for eligible benefits or health insurance plans
  • Federal and Provincial income or payroll tax deductions
  • Employment Insurance (EI) and Canada Pension Plan (CPP) deductions
  • Retirement plan contributions

Calculating net pay

When calculating net pay, employers and HR professionals generally follow these basic steps:

  1. Calculate gross pay using the hourly rate multiplied by the total hours worked or the salary divided by the number of pay periods
  2. Calculate and withhold benefit plan contributions
  3. Calculate and withhold Federal and Provincial income tax contributions
  4. Calculate and withhold any retirement plan contributions

Understanding gross pay vs. Net pay

Net pay is the amount of money employees receive on payday. Gross pay includes net pay and all the deductions that affect net pay (income tax deductions, EI, CPP, retirement and benefit plan contributions). Gross pay is the amount that is negotiated with employees and also the number seen on employment contracts.

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This guide is intended to be used as a starting point in analyzing an employer’s payroll obligations and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.