Payroll: from gross to net pay

Payroll is the business calculation that most people meet first: the cheque or deposit that arrives every pay period. For an employer, payroll is also one of the largest costs and one of the most regulated. Amounts must be withheld correctly, sent to the government on time and reported at year end, and mistakes bring penalties and interest. This lesson works through the arithmetic of a pay period, from the hours or salary that make up gross pay to the deductions that leave net pay, and then looks at what the employer pays on top.

Payroll rules in Canada come from three sources: federal law for the Canada Pension Plan (CPP), Employment Insurance (EI) and federal income tax; provincial law for provincial income tax, minimum wage, overtime and vacation pay (Quebec also runs its own pension plan, QPP, and parental insurance plan, QPIP); and the employment contract. The figures in this lesson are the 2026 rates at the time of writing (October 2026). They change every January, and sometimes mid-year, so always check the current Canada Revenue Agency (CRA) payroll tables before running a real payroll.

Gross pay

Gross pay is what an employee earns before anything is taken off. It is calculated in one of several ways, depending on how the employee is paid.

The number of pay periods matters. Weekly pay gives 52 periods a year, biweekly (every two weeks) gives 26, semi-monthly (twice a month) gives 24 and monthly gives 12. Biweekly and semi-monthly are easy to confuse: a biweekly payroll occasionally has 27 pay dates in a calendar year, while semi-monthly always has exactly 24. To convert an hourly wage to an annual equivalent, a common assumption is 2,080 hours (40 hours × 52 weeks).

Overtime

In Canada, overtime rules are set by each province and territory, and by the Canada Labour Code for federally regulated workplaces such as banks, airlines and telecommunications. The usual overtime rate is one and a half times the regular rate, but the threshold differs. Ontario requires overtime after 44 hours in a week. Alberta and British Columbia use both a daily threshold (8 hours) and a weekly one (44 hours in Alberta, 40 in British Columbia), and BC pays double time after 12 hours in a day. The federal Labour Code uses 8 hours a day and 40 a week. Many managers and some professionals are exempt. Always apply the rules of the province where the employee works.

Statutory deductions

Canadian employers must withhold three statutory deductions from most employees' pay: CPP contributions, EI premiums and income tax (federal and provincial combined). In Quebec, QPP replaces CPP, a lower EI rate applies and QPIP premiums are added, and Quebec provincial income tax is calculated under Revenu Québec rules.

The CPP basic exemption of $3,500 is spread evenly over the year's pay periods. For a biweekly payroll, the exemption per period is $3,500 ÷ 26 = $134.62, so CPP for a period is 5.95 % of (gross pay − $134.62). Once an employee's contributions reach the annual maximum, deductions stop for the rest of the year; the same applies to EI. Higher earners therefore see their take-home pay rise late in the year.

Income tax withholding

Federal and provincial income tax are progressive: each rate applies only to the slice of income within its bracket. For 2026, the federal rates are 14 % on taxable income up to $58,523, 20.5 % up to $117,045, 26 % up to $181,440, 29 % up to $258,482 and 33 % above that. The federal basic personal amount of $16,452 produces a non-refundable credit worth 14 % of that amount. Each province adds its own brackets and credits; Ontario, for example, starts at 5.05 % on taxable income up to about $53,891, with a basic personal amount of about $12,989, and adds the Ontario Health Premium, which is $750 a year for taxable income between $48,600 and $72,000.

Real payroll software uses the CRA's formulas, which also give credits for CPP and EI contributions and the Canada employment amount. A useful approximation is the annualization method: multiply the period's gross by the number of periods, work out the year's tax using the brackets, subtract the basic credits and divide back by the number of periods. Because it leaves out some credits, the approximation slightly overstates the tax.

# Simplified biweekly payroll, 2026 rates (illustration only)
def brackets(income, table):
    tax, lower = 0.0, 0.0
    for upper, rate in table:
        if income > lower:
            tax += (min(income, upper) - lower) * rate
        lower = upper
    return tax

gross, periods = 2400.00, 26
annual = gross * periods
# Canada (Ontario)
cpp = round((gross - 3500 / periods) * 0.0595, 2)
ei = round(gross * 0.0163, 2)
fed = brackets(annual, [(58523, .14), (117045, .205), (181440, .26), (258482, .29), (1e12, .33)]) - .14 * 16452
on = brackets(annual, [(53891, .0505), (1e12, .0915)]) - .0505 * 12989 + 750
ca = [cpp, ei, round(fed / periods, 2), round(on / periods, 2)]
print("Canada (ON):", ca, "net", round(gross - sum(ca), 2))
# United States (Pennsylvania)
fit = brackets(annual - 16100, [(12400, .10), (50400, .12), (105700, .22), (1e12, .24)])
us = [round(gross * .062, 2), round(gross * .0145, 2), round(fit / periods, 2), round(gross * .0307, 2)]
print("US (PA):", us, "net", round(gross - sum(us), 2))

Canada (ON): [134.79, 39.12, 257.1, 138.24] net 1830.75
US (PA): [148.8, 34.8, 204.15, 73.68] net 1938.57

Other deductions

Beyond the statutory deductions, an employee's pay may carry voluntary or contractual deductions. Some reduce taxable income, because they are taken before tax is calculated; others are taken after tax.

The employer's cost

The cost of an employee is more than gross pay. Canadian employers match the employee's CPP contributions dollar for dollar (and CPP2), pay EI premiums at 1.4 times the employee's premium, and in most provinces pay workers' compensation premiums. Some provinces add an employer health tax on large payrolls, such as Ontario's Employer Health Tax, BC's Employer Health Tax and Quebec's Health Services Fund contribution. On top of these come vacation pay (at least 4 % of wages in most provinces for employees with under five years' service), statutory holiday pay and any benefits.

Remitting and reporting

Withheld amounts are held in trust for the government. Employers send CPP, EI and income tax deductions, together with their own CPP and EI contributions, to the CRA, usually by the 15th of the following month for regular remitters (larger employers remit more often). At year end the employer issues each employee a T4 slip showing employment income and deductions, and files a T4 summary. Failing to remit on time leads to penalties, and directors can be held personally liable for unremitted source deductions.