The Anatomy of a Paycheque

Anyone who has ever cashed a paycheque knows that there’s a big difference between what you make and your actual take-home pay. If it’s not in your pocket, just where does all that money end up? Your pay is broken down into a number of components:

• gross earnings
• gross insurable earnings
• gross pensionable income
• net taxable income
• statutory deductions
• other deductions
• net pay

Let’s review a typical paycheque and decipher what each component means.

• Gross earnings (GE): The total of all of your cash earnings, including regular pay (i.e., your straight salary or
  your hourly rate times the number of hours worked in the pay period); overtime pay; and vacation pay.
  
• Gross insurable earnings (GIE): Your total gross earnings plus the dollar value of cash-related taxable
  benefits (e.g., employer’s matching contributions to a group RRSP) and taxable allowances (e.g., car and meal
  allowances). Your Employment Insurance (EI) and Quebec Parental Insurance Plan (QPIP) premiums are based
  on your gross insurable earnings.
  
• Gross taxable/pensionable income (GTI/GPI): Your gross insurable earnings plus non-cash-related taxable
  benefits (e.g., employer’s payment towards group term life insurance). This is the basis for your Canada
  Pension Plan (CPP) and Quebec Pension Plan (QPP) contributions.
  
• Net taxable income (NTI): Before income tax deductions can be calculated, your net taxable income must
  be determined. So your gross pensionable income is reduced by your contributions to things like a registered
  pension plan or RRSP, or your union dues (except for Quebec), as authorized by the Canada Revenue Agency
  (CRA) or the Ministère du Revenu du Québec (MRQ).
  
• Statutory deductions: An employer has a legal obligation to withhold statutory deductions, which, in order
  of priority, are: CPP or QPP (Quebec only) contributions, EI and QPIP (Quebec only) premiums, and federal
  and provincial income tax. Everywhere except in Quebec, provincial tax is collected as part of the federal
  income tax deduction. Quebec has separate deductions for federal and provincial taxes.
  
• Other deductions: The statutory deductions are an employer’s first priority. You may also have legal deductions
  (e.g., garnishments and family support deductions); company-compulsory deductions (e.g., union dues, your
  portion of benefit plan premiums); and voluntary deductions (e.g., Canada Savings Bonds, charitable donations).
  
• Net pay: Total all your deductions, subtract them from your gross earnings, and you’re left with your net pay.
  That’s what you’re actually taking home.

All jurisdictions require, at the very least, that the following be noted on an employee’s pay stub or statement of wages: the employee’s name, the date of the pay period, the rate of pay and hours worked at each rate, gross earnings, itemized deductions, and net pay. Different jurisdictions might have their own additional requirements of what has to be documented.

How You’ll Get Paid

Your basic earnings can be paid in four major ways:

• Salary: A yearly amount, divided by the number of pay periods in the year. For example, $26,000 divided by 26 pay periods equals a gross biweekly salary of $1,000.
  
• Wages: A rate per hour worked, e.g., $8.65 per hour.
  
• Piecework: A rate of pay per unit of production, e.g., $1.00 per box of peaches picked.
  
• Commissions: A percentage of a selected “base” amount, e.g., a real estate agent’s commission on the price of a house.

Pay periods vary but the most common are biweekly (60% of us are paid 26 times a year), followed by semimonthly (24 times a year), and weekly (52 times a year, common in construction and the restaurant industry). About 95% of people are paid on Thursday or Friday.

In addition to being required to pay employees on a regular payday, employers must pay any other amounts owed—such as overtime pay, general holiday pay, or severance pay—within a specified time, which varies by jurisdiction.

Nowadays, employees are usually paid by electronic funds transfer (i.e., the money is deposited directly into your bank account), or the old-fashioned payroll cheque. Though it has connotations of an “under-the-table” transaction, an employer may choose to pay an employee in cash. However, the employer still has to withhold and remit the required source deductions, report to and maintain records for the government, and provide a pay statement.

- Excerpt from Chapter 2 of Understanding Your Pay: The Canadian Guide for Communicating Pay to Your Employees, second edition (ISBN 978-0-9736167-0-5 (CD-ROM), © 2007, The Canadian Payroll Association)