What is payroll and how to calculate after reducing different types of taxes in USA, Canada and European union?

Payroll refers to the entire process of compensating employees, which involves calculating gross pay, deducting applicable taxes and contributions, and distributing net (take-home) pay. Payroll also includes keeping records and complying with legal tax obligations for both employees and employers.

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How to Calculate Payroll After Tax Deductions: USA, Canada, European Union

United States

To calculate net (after-tax) payroll for an employee:

1.      Calculate Gross Pay: Total earnings before taxes and deductions.

2.      Deduct Federal Payroll Taxes:

·         Social Security: 6.2% (employee), matched by employer.

·         Medicare: 1.45% (employee), matched by employer. Extra 0.9% applies to wages above $200,000 (employee only).

3.      Deduct Federal Income Tax:

·         Withheld per IRS tables based on Form W-4, marital status, allowance, and pay frequency.

4.      Deduct State and Local Taxes (if applicable):

·         Rates and rules vary by state and locality.

5.      Deduct Additional Items:

·         Retirement or other benefits, as well as employer contributions to unemployment taxes (FUTA/SUTA)—these are generally not deducted from the employee’s pay.

Example (Employee paid $2,500 biweekly):

·         Social Security: $2,500 × 6.2% = $155

·         Medicare: $2,500 × 1.45% = $36.25

·         Subtotal: $191.25 withheld from each paycheck for FICA.

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Canada

1.      Calculate Gross Pay.

2.      Deduct Income Tax:

·         Federal and provincial/territorial taxes withheld at source.

3.      Deduct Canada Pension Plan (CPP) contributions.

4.      Deduct Employment Insurance (EI) premiums.

5.      Other Deductions:

6.         Union dues, health insurance, or pension plan contributions (if applicable).

The Canada Revenue Agency (CRA) provides detailed guides and online calculators for source deductions. Employers are responsible for remitting both the employee and employer portions.

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European Union (varies by country)

1.      Calculate Gross Pay.

2.      Deduct Income Tax:

·         Withheld via Pay As You Earn (PAYE) in many countries (such as the UK or Ireland).

3.      Deduct Social Security/Insurance Contributions:

·         Employee share for health, pension, and unemployment schemes, with percentages and maximums depending on the country.

4.      Add Employer Contributions:

·         Employers pay their own portion of social taxes and sometimes additional local payroll taxes.

5.      Other Possible Deductions:

·         Occupational pension schemes, union fees, etc.

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Key Points:

·         Each EU country sets its own payroll and tax rates; for example, the Netherlands, Germany, and France all have different income tax brackets and social contribution rules.

·         Payroll totals and deductions are usually itemized on each pay slip.

In summary:

·         Payroll is the full process of calculating and distributing employee compensation, including required post-tax deductions.

·         Net pay is computed by deducting all required taxes and contributions (federal/national, state/provincial/territorial, and municipal/local, plus social security or equivalents) from gross pay.

·         Details of rates and deduction steps differ significantly between the USA, Canada, and each EU country.

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