Posted by Tim Stobbs on July 28, 2014
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?