10% Less Pay, But $8 Less on My Paycheque

I got my first pay cheque after I’ve reduced my working hours by 10%, so I’m also getting paid 10% less.  Yet after looking back at my previous pay stub I’m only making $8 less in take home pay.  How the hell is that possible?

Well the answer lies in a little bit of math that most people don’t really consider.  First off I make roughly $100,000/year at full time hours.  So at 90% time my salary drops to $90,000.  So $10,000 year less or $417 per pay cheque, yet that is on a gross basis.  You have to consider that $10,000 is getting taxed at my highest marginal tax rate or roughly 40% income tax.  So in fact if you reduce that $416 by 40% you would expect a $250 reduction on my take home pay instead of $417.  Yet my reduction was only $8, so we are closer but not there yet.

The answer was in the fact I had just max out my CPP/EI payments for the year on the previous pay cheque.  The 2014 contribution rates are 4.95% for CPP while EI is 1.88%, so all total you lose 6.83% of your pay cheque to these until you max them out for a given year.

So it may seem sort of obvious by now that out of my 10% less pay, I lose 4% approximately to income tax normally and the rest to CPP/EI, thus once I maxed out those my tax home pay is nearly identical for the last half of the year.  Of course the real drop in pay kicks in next year when I start paying CPP/EI again, but in the interim it does mean the rest of the year is fairly easy to live with the salary reduction.

Yet for now, life is easy and I don’t even really notice that I’m making less money.  It’s sort of a nice way to break myself in to the change in salary.  So have you ever got a weird pay stub?  Did you figure out what the issue was?

3 thoughts on “10% Less Pay, But $8 Less on My Paycheque”

  1. When I worked for a company I studied my pay each month to make sure I knew where it was all going. Now as a freelancer, I just make sure the invoice gets paid and I remit the correct amounts to the government and in my books. It is a lot easier to see where my money is going.

  2. I can’t say I had any really weird paystubs but I can surely relate to how a paycheck changes when you reduce your weekly hours worked.

    I did that twice in the last decade before I ERed in late 2008. The first time, I reduced my weekly hours worked from 37.5 to 20. That’s a 47% drop in gross pay but my net pay dropped by only 42%. Part of it was the tax structure like it was for you but I also had to pay for more of my health insurance premiums and less for my pre-tax commutation savings reimbursement account. I also had less going to my 401k for a while but then restored the reduced company match with added pre-tax contributions.

    The second time I reduced my weekly hours worked from 20 to 12, a 40% reduction. But my net pay went down by only 27% because I stopped the 401k contributions and lost eligiblity in the group health program (so I was paying for my HI separately and on an after-tax basis). The pre-tax commutation also went down a little.

    Of course, when I stopped working there altogehter, my paycheck went down to zero but I had replaced it with a monthly “paycheck” in the form of monthly bond fund dividends which had zero taken out for taxes and anything else. And I did not have to haul my sorry as to any office to get the money – it just magically “appeared” in my bank account. My kind of paycheck!

  3. I constantly have strange paychecks, RRSP matching is on a % of salary basis at my company which I try to max out as soon as possibly. I also get my expenses reimbursed on my paycheck. These items are really a red herring though.

    The most important thing you should be doing as an employee is making sure your paycheck is correct! Some people take it as a give… wrong attitude. My job as an employer is to not mess with my employees cash. You want to see people quit, screw up their paychecks, even once is enough for people to quit. Rightly so.

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