FINANCIAL MATHEMATICS

MATH 10 – UNIT 4

NET PAY

FM. 4

Students are expected to:• Explain why gross pay and net pay are not the

same.• Determine the Canadian Pension Plan (CPP),

Employment Insurance (EI), and income tax deductions for a given gross pay.

• Determine net pay when given deductions (e.g., health plans, uniforms, union dues, charitable donations, payroll tax).

Vocabulary

• earnings• cheque (same as check)• pension• deductions• snowmobile• physical therapist• offshore• pay stub

Key Term

NET PAY – the amount you receive on a paycheque after deductions have been taken off. Also called take-home pay

Key Term

DEDUCTIONS – an amount of money subtracted from gross pay. It includes:

- federal income tax- CPP ( Canada Pension Plan)- - Employment Insurance (EI)

It can also include:

- union dues, vacation pay, and health or dental insurance

Investigate Net Pay

• Please refer to pages 44-45 of your FM textbook.

Deductions and Net Pay • Net Income:

– This is the amount made AFTER deductions are taken off for a variety of things (EI, CPP, RRSP, income tax…)

– Also called “take-home” pay.

• Now that you are familiar with all types of GROSS salary calculations (Lessons 2.1-2.3), let’s factor in some deductions to get a truer picture of what people like you and I make in Canada.

CPP – Canadian Pension Plan

• Provides you with a pension when you retire

• Both you and your employer contribute the same amount each paycheque.

• The 2010 Contribution Rate is 4.95% of everyone’s gross annual income.

CPP Example and Yearly Max

• 2010 Contribution Rate - 4.95% of gross annual income

• Example: • If your annual salary is $65,000, how much

will you contribute to CPP over the year?

• $65,000 x 0.0495 = $3217.50/yr• However, the federal government sets a

limit of how much CPP they can take: In 2010 the max CPP was $2163.15.

EI Premium

• Employment Insurance Premium

• The government collects 1.4 times from your employer as from you. So if you contributed $1.00, your employer would contribute $1.40.

• In the year 2010:– EI Rate is 1.73% of an employee’s

GROSS income

Example

• If Tara's gross earnings are $12 987.00 how much will she pay in CPP? (rate of 4.95%)

Example

• If Tara's gross earnings are $12 987.00 how much will she pay in EI? (rate 1.73%)

• What is Tara’s net earnings?

Example

• If Brandon’s gross earnings are $3 876.00 how much will he pay in EI? (rate 1.73%)

• How much in CPP? (4.95%)

• What is his net earnings?

Federal TaxFederal tax rates for 2010 are:• 15% on the first $40,970 of taxable

income, + • 22% on the next $40,971 of

taxable income (on the portion of taxable income between $40,970 and $81,941), +

• 26% on the next $45,080 of taxable income (on the portion of taxable income between $81,941 and $127,021), +

• 29% of taxable income over $127,021.

IF you made $92 000 last year how much would you pay in federal income tax?

Step 1:

Calculate the 15% tax deduction for the first $40,970.

Step 2:

Calculate the 22% tax deduction for the next $40,971.

Step 3:

Calculate the 26% tax deduction for the remaining income.(how much is remaining untaxed?)

Step 4:

How much income tax did you pay?

Step 5: How much is your net income?

Nova Scotia Provincial Tax

• 10% of taxable income

Build Your Skills

1. If the federal tax rate is 15%, how much is deducted from your $750.00 paycheque?

$750.00 x 0.15

=$112.50 deduction

2. If your short-term disability insurance rate is 0.5%, what do you pay if your paycheque is $300.00?

$300.00 x 0.005

= $1.50 would be paid

3. If your Canada Pension Plan (CPP) contribution rate is 4.95% and your salary is $1578.00 every two weeks, what will be the CPP deduction?

$1578.00 x 0.0495

= $78.11 deduction

4. Samantha’s monthly taxable income was $3276.54. If she paid $757.24 in taxes, what percentage of her taxable income did she pay?

$757.24 ÷ $3276.54=0.2311

=0.2311 x 100 =23.11%

5. Patricia’s before-tax deductions amounted to $75.47 on a gross salary of $700.00.A) If she paid $93.68 in federal tax, what is her tax rate?$93.68 ÷ $700.00=.1338.1338 × 100 =13.38%

5. Patricia’s before-tax deductions amounted to $75.47 on a gross salary of $700.00.B) If she paid $36.85 in territorial tax, what is her tax rate?$36.85 ÷ 700.00=.0526.0526 × 100=5.26%

6. Hans paid $37.51 Employment Insurance (EI) on his taxable monthly income of $2168.21. What is the EI rate?$37.51 ÷ $2168.21=0.01730.0173 × 100=1.73 %

7. Randy works at two jobs. In one job, he earns $325.00/week, and had deductions of $56.67 federal tax, $13.12 provincial tax, $16.09 CPP, and $4.14 EI. At his other job, he earns $567.00/week and pays $79.42 federal tax, $16.82 provincial tax, and $18.12 CPP. What is his net income?

Job 1:Total deductions: $56.67+$13.12+$16.99+$4.14=$90.92$325.00−$90.92=$234.08Job 2:Total deductions: $79.42+$16.82+$18.12=$114.36$567.00−$114.36 =$452.64$234.08 + $452.64= $686.72

• 8. As a part-time college instructor, Kathy teaches an introductory course on Mexican history. She has a biweekly gross income of $3654.75. Her before-tax deductions include a short-term disability premium of 0.5%, union dues of 3.1% and a pension amount of 4%. If she pays federal tax at a rate of 18.5%, provincial tas at a rate of 6.2% CPP at 4.95% and EI at 2.2%, what is her net income?

Short-term disability$3654.75 × 0.005=$18.27

Union dues$3654.75 × 0.031=$113.30

Short Term $18.27 Union Dues $113.30

Pension$3654.75 × 0.04=$146.19

Gross income$18.27+$113.30+$146.19=$277.76$3654.75 − $277.76=$3376.99

Gross Income $3376.99Federal Tax$3376.99 × 0.185=$624.74Provincial Tax$3376.99 × 0.062=$209.37CPP $3376.99 × 0.0495=$167.16EI $3376.99 × 0.022=74.29

$624.74+$209.37+$167.16+$74.29=$1075.56 (TOTAL OF ALL DEDUCTIONS!)

$3376.99−$1075.56=$2301.43

Example # 1

Refer to page 46-47

Classwork - Page 48- Questions 1-4

Homework- Page 48- Question # 5

Example # 2

Refer to pages 49-51.Note: There are some errors of this pages due to tax calculations. Please download online.

Classwork

Questions # 1-7 p. 52

Homework

Questions 8-11 p. 53

Reference

http://www.novascotia.ca/finance/en/home/taxation/tax101/harmonizedsalestax/default.aspx