The Three Layers of Payroll

Every employee’s pay can be viewed in three simple layers:

1. Gross Pay — the total amount an employee earns before deductions.
2. Deductions — mandatory withholdings for taxes and contributions.
3. Net Pay — the amount the employee actually receives.

Let’s unpack each one.

1. Gross Pay — The Starting Point

Gross pay includes all taxable compensation an employee earns during the pay period. This can include:

• Hourly wages or salary
• Overtime
• Bonuses or commissions
• Statutory holiday pay
• Vacation pay (if paid out instead of accrued)
• Taxable benefits (for example, personal use of a company vehicle or certain allowances)

Example:
A technician earns $25/hour and works 80 hours in a biweekly pay period.
Their gross pay = 80 × $25 = $2,000.

If they also receive a $200 bonus, their total gross pay = $2,200.

2. Deductions — What Gets Withheld

Deductions are the amounts you withhold from each employee’s gross pay before issuing their paycheque. In Canada, there are three core mandatory deductions:

1. Income Tax — based on the employee’s total earnings and TD1 form (federal and provincial).
2. Canada Pension Plan (CPP) — both employer and employee contribute (in 2025, 5.95% up to the annual limit).
3. Employment Insurance (EI) — employee pays 1.66% up to the annual maximum; employers pay 1.4× that amount.

Optional deductions may also apply:

• Group benefits premiums
• Union dues
• Retirement plan contributions
• Repayments or garnishments

The key rule: you must remit all deductions (plus your matching portions for CPP and EI) to the CRA by the due date. Those funds aren’t yours to hold.

3. Net Pay — What the Employee Takes Home

After deductions are subtracted, what’s left is net pay — the amount deposited to the employee’s account.

Example:
Using the gross pay above ($2,200):

DescriptionAmountGross Pay$2,200.00Income Tax-$310.00CPP (employee)-$131.00EI (employee)-$36.00Net Pay$1,723.00

As the employer, you also owe your share of CPP and EI:

• CPP (employer) = $131.00
• EI (employer) = $50.40

These employer contributions are in addition to the employee’s pay — not deducted from it.

Where Employers Go Wrong

Common payroll mistakes include:

• Forgetting to deduct one or more components.
• Calculating CPP/EI incorrectly when an employee hits the yearly maximums.
• Missing remittance deadlines.
• Rounding inconsistencies between software and manual entries.

Even small errors compound quickly across multiple pay periods. That’s why using payroll software (Wagepoint, QuickBooks, etc.) or working with a bookkeeping partner helps maintain accuracy.

Understanding Pay Stubs

Every pay period, you must provide a pay statement showing:

• Pay period dates
• Hours worked or salary amount
• Gross pay
• Each deduction clearly listed
• Net pay

Pay stubs are not only required under employment standards — they also protect both you and your employee if there’s ever a dispute.

The Takeaway

Payroll is a formula — but it’s also a responsibility.
Every dollar has a destination: part goes to your team, part to the CRA, and part to future benefits.
When you understand how those pieces connect, you can run payroll confidently and avoid unpleasant surprises later.

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