Calculating All Mandatory Deductions

Lesson 2: Personal Taxes - All Mandatory Deductions

   Constructing Knowledge

When calculating the three mandatory deductions, you will combine the skills of calculating EI, CPP, and Income tax. These can be done in any order. Net pay is determined by subtracting these three deductions from the gross pay.

Federal and Provincial Income Tax Table

Bracket	Tax Rate	Income
1	25%	the first $43 561 of income
2	32%	income over $43 561 but under $87 123
3	36%	income over $87 123 but under $135 054
4	39%	income over $135 054

• EI: The rate is 1.88% and the maximum contribution is $913.68
• CPP: The rate is 4.95% and the maximum contribution is $2 425.50, where the first $3 500 of income is exempt.

   Multimedia

A video describing the calculation of all mandatory deductions and monthly net pay is provided.

EXAMPLE

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Yolanda earns a gross pay of $62 300/year. If Yolanda is paid once a month, what is her monthly net pay on each paycheque?

Solution

To calculate annual net income, you must subtract the mandatory deductions of EI, CPP, and Income tax from her gross pay. This can be done in steps.

Step 1: El contribution

EI	= 1.88% × gross pay
	= 0.0188 × $62 300
	= $1 171.24

This is above the maximum contribution, so Yolanda will pay $913.68.

Step 2: CPP contribution

CPP income	= gross income - exemption
	= $62 300 − $3 500
	= $58 800.00

CPP	= 4.95% × CPP income
	= 0.0495 × $58 800
	= $2 910.60

This is above the maximum contribution so Yolanda will pay $2 425.50.

Step 3: Income tax

Yolanda's income falls into the second tax bracket. Yolanda's gross pay should be split according to the tax brackets. The first tax bracket is $43 561 and the second tax bracket amount will need to be calculated.

second tax bracket earnings	= $62 300− $43 561
	= $18 739

Income tax can then be calculated by adding together the Income tax from each tax bracket.

Income tax	= first bracket tax + second bracket tax
	= (tax rate × first bracket pay) + (tax rate × second bracket pay)
	= (25% × $43 561) + (32% × $18 739)
	= (0.25 × $43 561) + (0.32 × $18 739)
	= $10 890.25 + $5 996.48
	= $16 886.73

Yolanda will pay $16 886.73 in income tax.

Step 4: Annual net pay.

Subtract the mandatory deductions from her annual gross pay to get her annual net pay.

net pay	= gross pay − EI − CPP − Income tax
	= $62 300 − $913.68 − $2 425.50 - $16 886.73
	= $42 074.09

Step 5: Calculate monthly net income

Monthly net pay is calculated by dividing the annual net pay by 12.

monthly net income	= yearly net income ÷ 12
	= $42 074.09 ÷ 12
	= $3 506.17

Yolanda's monthly net pay is $3 506.17.




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