Calculating Voluntary Deductions

Lesson 2: Personal Taxes - Calculating Voluntary Deductions

   Constructing Knowledge

When calculating for net income remember to take into consideration all voluntary deductions as well as the three mandatory deductions (EI, CPP and Income Tax).

Federal and Provincial Income Tax Table

Bracket	Tax Rate	Income level
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.

Follow these steps to calculate net income:

Step 1: Calculate annual gross pay (if not given)
Step 2: Calculate mandatory deductions based on annual gross pay
Step 3: Calculate annual voluntary deductions
Step 4: Calculate net income

   Multimedia

A video describing calculating net pay after all mandatory and voluntary deductions is provided.

EXAMPLE

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Zach's gross pay is $6540/month. He has union dues of $45 per month, health benefits of $120 per month, and a work related pension plan of $550 per month. What is Zach's annual net income after all deductions?

Solution

Step 1: Calculate annual gross pay

gross pay: $6 540 × 12
= $78 480

Step 2: Calculate mandatory deductions based on annual gross pay

EI

EI	= 1.88% × gross pay
	= 0.0188 × $78 480
	= $1 475.42

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

CPP

CPP income	= gross income − personal exemption
	= $78 480 − $3500
	= $74 980

CPP	= 4.95% × gross pay
	= 0.0495 × $74 980
	= $3 711.51

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

Income Tax

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

second tax bracket earnings = $78 480 − $43 561
= $34 919

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

Income tax	= first bracket tax + second bracket tax
	= (tax rate × first bracket pay) + (tax rate × second bracket pay)
	= (25% × $43 561) + (32% × $34 919)
	= (0.25 × $43 561) + (0.32 × $34 919)
	= $10 890.25 + $11 174.08
	= $22 064.33

Zach would pay $22 064.33 in income tax.

Step 3: Calculate annual voluntary deductions

To calculate Zach's annual net income, it is important to have all the deductions in annual figures. To do this multiply the monthly amounts by 12.

union dues = $45 × 12
= $540

health benefits = $120 × 12
= $1 440

work pension = $550 × 12
= $6 600

You can now add up all the voluntary deductions.

voluntary deductions = $540 + $1 440 + $6 600
= $8 580

Step 4: Calculate net income

To determine annual net income, subtract the mandatory and voluntary deductions from gross pay.

net income	= gross pay − EI − CPP − income tax - voluntary deductions
	= $78 480 − $913.68 − $2 425.50 − $22 064.33 − $8 580
	= $44 496.49

Zach's yearly net income is $44 496.49




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