How to calculate payroll step by step

Payroll calculation involves five essential steps:

1. Collecting employee information and hours worked.
2. Calculating gross pay.
3. Applying deductions and taxes.
4. Adding benefits and employer contributions.
5. Determining net pay and issuing pay cheques.

For small and medium-sized businesses (SMEs) in Canada, payroll can be time-consuming and prone to errors if done manually. Following a structured method or relying on payroll software such as Nethris SME Payroll Management, helps ensure accuracy, compliance, and efficiency.

Step 1 – Collect employee information and hours worked

The foundation of payroll begins with accurate employee data.

Employers must gather:

• Employment contracts and wage agreements.
• Hourly rates or annual salaries.
• Overtime eligibility and pay rules.
• Vacation accruals and sick leave.

Accurately tracking hours worked (using timesheets or software) ensures employees are fairly compensated and employers remain compliant with provincial labour standards.

Step 2 – Calculate gross pay

Gross pay represents an employee’s earnings before deductions.

• Hourly employees: Multiply the hourly rate by total hours worked, including overtime.
• Salaried employees: Divide the annual salary by the amount of pay periods.
• Additions: Commissions, bonuses, allowances, and shift premiums.

Gross pay is the first major figure employers must calculate before moving to deductions.

Step 3 – Apply payroll deductions and taxes

Canadian payroll requires specific statutory deductions:

• CPP or QPP: Canada Pension Plan (or Québec Pension Plan) contributions.
• EI: Employment Insurance premiums.
• Federal and provincial income taxes.

Additionally, some deductions are voluntary, such as:

• Group RRSP contributions
• Union dues
• Health or dental insurance premiums

Employers must remain compliant with federal and provincial laws. The Canada Revenue Agency (CRA) provides detailed guidance on Payroll Deductions

Step 4 – Add benefits and employer contributions

Beyond deductions, employers must add certain benefits and contributions:

• Employer-paid health insurance premiums
• Pension plan contributions
• Statutory benefits (e.g., EI employer portion, CPP/QPP employer match)

Failing to account for employer obligations can distort payroll costs.

Step 5 – Calculate net pay and issue paycheques

The final step is to determine net pay, calculated as:

Net Pay = Gross Pay – Deductions + Benefits

Payment is then issued through:

• Direct deposit (most common in Canada)
• Cheques
• Paycards (less frequent but used in some industries)

Transparency is crucial, each employee should receive a pay stub showing gross pay, deductions, contributions, and net pay.

Common payroll mistakes and how to avoid them

Even experienced employers can make costly payroll mistakes:

• Misclassifying employees (contractors vs. employees)
• Incorrect deduction rates leading to CRA penalties
• Late payroll deposits, causing dissatisfaction among employees

Solution: Using an automated solution like Nethris payroll service reduces errors and ensures compliance with Canadian legislation.

Payroll software vs. Manual calculation

Payroll errors can frustrate employees and cost employers dearly. Automation reduces both time and financial losses

Frequently asked questions (FAQ)

What information do I need to calculate the payroll?

You need employee personal data, tax information (TD1 forms in Canada), wage rates, and benefits enrollment details.

How do I calculate payroll deductions in Canada?

Deductions include CPP/QPP, EI, and federal/provincial taxes. Tools like the CRA Payroll Deductions Online Calculator simplify this process.

What is the difference between gross pay and net pay?

Gross pay is total earnings before deductions. Net pay is the final amount employees take home after taxes and contributions.

How can Nethris help businesses calculating payroll?

Payroll software automates tax calculations, generates pay stubs, ensures compliance, and saves businesses hours each month.

A personalized demonstration can help you understand how Nethris helps businesses manage their payroll. Request a demo today.