4.0: Introduction

Has your employer paid you all that you have earned? While this problem is difficult to track, the Canadian Payroll Association estimates the frequency of payroll errors to be 5.7%.[1] Studies in the United States have found that 33% of employers have made some form of payroll mistake, whether in the calculation of pay or in deductions.[2] This means that you must always check your paycheque to ensure that you receive the correct amount of pay. If you are overpaid, you are not entitled to keep the overage and must reimburse your employer. If you are underpaid, your employer owes you money.

We all work to earn enough income to cover our expenses, such as mortgages, car payments, and recreational activities. There are many ways to earn that income, ranging from straight salaries and hourly wages to commission rates and piecework wages. The amount of money you generate by working is called your gross earnings. If you are an employee, this amount is then subject to automatic deductions, including federal taxes, provincial taxes, employment insurance, Canada Pension Plan, along with any other deductions required by your employer. All of these government deductions are submitted to the government on your behalf. What is left over after all of these deductions is your net pay, which is your take-home amount.

Payroll forms one of the largest and most contentious expenses in most organizations. It is critical to get it right. Workers often go on strike if they believe their take-home pay is unfair. And payroll errors are costly and time consuming to fix, aside from their impact on employee satisfaction.

Payroll decisions are affected by inflation. Ask your parents how much things cost when they were young. In the 1950s, my parents attended movie theaters for 25¢ admission. A chocolate bar was 5¢. Today, attending a first-run movie costs $8.99 or more, and chocolate bars are typically around one dollar. To keep up with these rising prices, incomes have constantly increased. In 1959, family income was approximately $4,500 compared to the 2009 median family income of $68,410.[3] Can you still afford the same things that people could afford back then? Business indexes are regularly used to understand the change over time in various quantities or how a quantity at one time point compares to the corresponding value at a certain reference time point.

For example, the next time you are offered a raise at work, an index can tell you whether you are truly receiving a raise or not! Assume that product prices have risen by 2% year-over-year. If you are offered a raise less than 2%, you have taken a wage cut and have less purchasing power than before. A raise of 2% allows you to at least break even, and anything above 2% increases your purchasing power.

Whether you are pursuing a career in human resources, economics, or some other field, the issues of gross earnings, income taxes, and indexes remain important both personally and professionally. This chapter examines some of the basic mathematical concepts involved in these calculations.

References

1. Steven Van Alstine, Vice-President of Education, the Canadian Payroll Association.
2. Mie-Yun Lee, “Outsource Your Payroll,” Entrepreneur. www.entrepreneur.com/humanresources/article47340.html (accessed November 29, 2009).
3. Statistics Canada, “Median Total Income, by Family Type, by Province and Territory,” CANSIM table 111-0009, www40.statcan.ca/l01/cst01/famil108a-eng.htm (accessed October 19, 2010).

Contributors and Attributions

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