Understanding a paycheque

A paycheque, the beginning of the line for most people’s finances. For something so common, it is not exactly straight forward. To understand your paycheque, there are a couple key terms you should know first. 

Gross Salary – This is your income before any deductions. This is the most common way to refer to your annual or hourly salary. When you are paid, however, you sadly do not get to take home this amount.

Net Salary – This is your income after deductions. Another way of saying this is, your take-home money. This number is important because it is the actual amount of money you have to spend.

Deductions – These are what are removed from your paycheque between the Gross and Net Salary. Deductions consist of things like taxes, Canadian Pension Plan (CPP), Employment Insurance (EI), Long Term Disability, contributions to employer health and pension plans and/or union dues. We will discuss these topics in further depth in future sections, but for now all you need to know is that these are the costs of making money.

This paycheque is divided up into a couple different sections: Period, Earnings, Deductions and Totals.

The period section typically shows you the start and end dates for the period you are being paid for and when it will be paid. Sometime the start date of the period is missing, this is because it is assumed you will be paid all previous hours up until the the end date regardless of when they occurred, so a start date is not relevant. Common pay periods are every two weeks, twice a month and monthly. Knowing the frequency of your paycheques is important for budgeting and planning for expenses in personal finance. This way you can try to sync up recurring bills and/or mortgage payments so they conveniently occur alongside your payments. 

The earnings section shows the type of payments you will be receiving and how much of them. In this example, John Smith is being paid his regular hours and overtime hours. You can see the pay differential between the two, and for how many hours of each he is being paid for. One of the most common payroll problems is an employee being paid out for an incorrect amount of hours, you can quickly tell if this is the case by checking this section.

The deductions section breaks down the different deductions to each individual deduction and how much it costs. You can see many we have already mentioned such as CPP, E/I, Long Term Disability, as well as some we didn’t like Life Insurance. While there is not usually much you can do about deductions, it is good practice to have an idea of everything being deducted from your cheque. You might find you’ve been paying for something optional that you don’t need! Or you’ve been paying something mandatory that you should start taking advantage of like health benefits.

The totals section displays the totals for the current pay period, and the year-to-date amount (YTD). It is smart to check these numbers on every cheque you receive, to make sure they line up with expectations. If you have an annual salary and every paycheque should be the same, it’s easy to see when one is off simply from these numbers not being what they normally are.

In this example paycheck, you can see John Smith lost ~25% of his paycheque to deductions, a fairly accurate amount depending on the province he lives and the optional deductions he is opted in to. This makes quite the difference, and really highlights the importance of personal finance knowledge. As John’s income increase, his average deduction rate usually goes up as well, mostly due to income taxes which we will talk about in the next article.