Gross pay vs. net pay: what’s the difference?
If figuring out the correct pay for your employees makes your palms sweat, you’re not alone. As a small business owner, gross pay versus net pay calculations can feel like a math problem with no answer key, especially when the numbers don’t add up. On top of that, you need to explain these calculations clearly when an employee asks why their paycheque looks different from what they expected.
Canadian employers have to factor in several deductions, including Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, income tax, and any voluntary deductions your employees choose. Each of these plays a role in the difference between gross pay and net pay.
This guide breaks down gross pay versus net pay from a payroll perspective, including how CPP, EI, and income tax factor into the math, so you can pay your team accurately and stay on the right side of the Canada Revenue Agency (CRA).
What is gross pay?
Gross pay is the total amount an employee earns for the work they’ve done over a given pay period, before any deductions come off. It can include salary or wages, overtime pay, bonuses, and other taxable compensation.
For example, when a job posting lists an annual salary of $70,000, that’s the gross salary amount. The gross pay figure does not include your employer contributions to CPP and EI. Those are costs you pay on top of an employee’s gross pay, not part of it.
How to calculate gross pay
Salaried employees
Gross pay for a salaried employee is their annual salary divided by the number of pay periods in a year.
If you pay Tom $84,000 a year on a monthly basis, his gross pay is $84,000 ÷ 12 = $7,000 per month.
If an employee earns commissions, overtime, or a bonus on top of salary, add that amount to their base gross pay for the period before calculating deductions.
Hourly employees
For hourly employees, gross pay follows four steps:
- Count the hours worked in the pay period.
- Multiply hours worked by the hourly rate.
- Multiply any overtime hours by the overtime rate.
- Add regular pay and overtime pay together.
Francine is paid weekly at $25 an hour and works 40 hours, plus 5 hours of overtime at time and a half ($37.50 an hour).
Regular pay: 40 × $25 = $1,000
Overtime pay: 5 × $37.50 = $187.50
Weekly gross pay: $1,187.50
Note: Overtime thresholds and rates vary by province, so this example uses a simple 40-hour week for the math.
What is net pay?
Net pay is often called take-home pay. It’s what an employee receives after you’ve deducted income tax and other statutory and voluntary amounts from their gross pay. It’s the number that lands in their bank account every payday.
To calculate net pay, you need three things: the employee’s gross pay for the period, the income tax owing over that period, and any additional deductions the employee has authorized. The formula is straightforward:
Gross Pay − Deductions = Net Pay
Some of these deductions are required by law, others are optional.
Statutory deductions: what comes off gross pay
Three deductions apply to almost every Canadian paycheque: CPP, EI, and income tax. Here’s what each one covers.
Canada Pension Plan (CPP)
CPP (or the Quebec Pension Plan, QPP, if you’re in Quebec) is a government program that helps employees save for retirement. It’s calculated as a percentage of pensionable earnings, up to an annual maximum that the CRA adjusts every year. As an employer, you match every dollar of CPP your applicable employees contribute.
Since 2024, a second CPP tier (commonly called CPP2) applies to a band of higher earnings above the standard maximum, at its own separate rate. Like the base CPP rate, it’s matched by the employer.
For example, if an employee contributes $200 in a month toward CPP, you’ll match it with $200 as an employer. The total remitted to the CRA for that employee’s CPP that month is $400. Employers missing the employer-match piece are one of the more common sources of payroll errors, so it’s worth double-checking your calculations, or letting payroll software like Wagepoint catch the match automatically.
Employment Insurance (EI)
EI premiums fund temporary income support for employees who lose their job or need to step away from work for reasons like illness, pregnancy, or caring for a new child or family member. Like CPP, EI is calculated as a percentage of earnings up to an annual maximum, and the employer’s share is set at a fixed multiple of the employee rate.
Quebec residents pay a lower EI rate because Quebec runs its own Quebec Parental Insurance Plan (QPIP) alongside EI.
Income tax
Federal and provincial income tax withholding depends on an employee’s total income, province of employment, and the personal tax credits they’ve claimed on their TD1, Personal Tax Credits Return forms. Employees complete two of these: one federal, one provincial or territorial.
CPP, EI, and income tax rates and maximums are set by the CRA each year and change annually. For the current year’s exact percentages, dollar maximums, and thresholds, see our payroll tax vs. income tax guide, or the CRA’s Payroll Deductions Online Calculator for exact withholding on a specific employee.
Voluntary deductions
Voluntary deductions come off net pay after CPP, EI, and income tax are calculated. They’re not part of the gross-to-net math for statutory amounts. Common examples include an employee buying something from your workplace, like meals or uniform pieces.
Because these deductions are voluntary, employees can change or stop them at any time. Make sure you have a clear process for employees to update these amounts, and that any changes are reflected before the next pay run.
How to calculate net pay from gross pay
Once you have gross pay, net pay follows the same math every time:
- Start with gross pay for the period.
- Subtract CPP contributions from pensionable earnings (and CPP2, if the employee’s year-to-date earnings have passed the YMPE).
- Subtract EI premiums from insurable earnings.
- Subtract income tax based on the employee’s TD1 and province of employment.
- Subtract any voluntary deductions the employee has authorized.
What’s left is net pay, the amount that reaches the employee’s bank account, and the same total your payroll software should be able to produce automatically without you working through each step by hand.
Gross pay vs. net pay: the key differences
Now that you’ve walked through both calculations, here’s a quick side-by-side recap. The difference between gross pay and net pay comes down to timing: gross pay is calculated first, and net pay is what’s left after deductions are applied.
| Gross pay | Net pay | |
| What it is | Total earnings before deductions | Take-home pay after deductions |
| Includes | Base wages, overtime, bonuses, commissions, taxable benefits, vacation pay | CPP, EI, tax, and voluntary deductions already applied |
| Shown where | Job offers, employment contracts | Employee’s bank deposit, paystub |
| What it’s used for | Calculating CPP, EI, and tax owing | What the employee can spend |
Paystubs and pay transparency
Employers are legally required to give employees a clear breakdown of how their net pay was calculated, whether the paystub is paper or digital. Because deductions and bonuses can shift from one pay period to the next, employees need to understand what was taken from their gross pay and where it went. Most paystubs bold the net pay figure so it’s easy to spot.
With Wagepoint, employees can log into their employee portal to see a full breakdown of their paystubs for every pay period, so they’re not stuck asking you to explain a number.
What if you make a payroll mistake?
Getting net pay right can be stressful for small business owners, especially if you’re calculating manually. It’s easy to hit the wrong key on a calculator or drop a digit in a spreadsheet.
If you underpay an employee, let them know and pay the difference as quickly as you can. Employees rely on their wages for everyday costs, and they’re counting on you to get it right.
Overpayments are trickier. Depending on your province, you may be able to deduct the overpayment from the employee’s next pay directly, or provincial employment standards may require a different process, sometimes including the employee’s written consent. Check your province’s employment standards before deducting an overpayment.
Tips for managing gross pay and net pay as an employer
Communicate with your employees
Clear, ongoing communication about pay and deductions helps you avoid awkward conversations, payroll mistakes, and disputes down the road.
Use payroll software built for Canadian rules
Cloud-based payroll software lets you input and approve payment data instead of building every formula from scratch. Wagepoint, for example, is built specifically for Canadian payroll: it calculates CPP, EI, and tax deductions in line with CRA formulas, skips re-approving pay that hasn’t changed with auto-run, and once it’s set up, files your CRA and Revenu Québec (RQ) remittances on your behalf. Look for software built for Canada’s rules, so you’re not tracking formulas, due dates, and approvals separately.
Stay current on the rules
CPP and EI rates, along with tax brackets and credits, change every year. Check the CRA’s website regularly, and keep an eye on updates to the Income Tax Act, insurable earnings regulations, and the Employers’ Guide to Payroll Deductions and Remittances. Wagepoint updates its calculations each year to reflect the CRA’s latest rates, so even if a change slips past you, your numbers stay accurate.
The bottom line
Gross pay is the total you owe an employee for a pay period. Net pay is what’s left after CPP, EI, income tax, and any voluntary deductions come off. Getting comfortable with both, and staying current on the CRA’s yearly rate changes, keeps you compliant and keeps your employees’ trust intact.
Wagepoint handles the gross-to-net calculations for you, so you can spend less time doing payroll math and more time running your business. See how Wagepoint can simplify payroll for your business.
Frequently asked questions
Why does my net pay change from one payday to the next?
Net pay can shift because of overtime, bonuses, a change in hours, or because an employee’s year-to-date earnings crossed a CPP or EI threshold partway through the year. Voluntary deductions can also change if an employee updates them.
Net pay is after tax. It’s what’s left once income tax, CPP, EI, and any voluntary deductions have been subtracted from gross pay.
Gross pay is the total amount an employee earns before deductions. Net pay is what they receive after CPP, EI, income tax, and any voluntary deductions come off.
