Free course · Lesson 8 of 12 · 12 min
Payroll basics in the US and Canada
From gross pay to net pay, the employer's share of payroll taxes, the journal entries behind a pay run, and what has to be sent to the IRS or the CRA and when. With 2026 figures.
Bookkeeping Basics / Lesson 8
- Work from gross pay to net pay for a US and a Canadian employee.
- Know which payroll taxes the employee pays and which the employer pays.
- Record a pay run and the remittance as journal entries.
- Know the main filing and remittance deadlines and year-end forms.
Employee or contractor?
Payroll is for employees. Contractors send you an invoice and you pay it as a bill (lesson 6). Whether someone is an employee depends on the working relationship, such as who controls how and when the work is done and who supplies the tools, not on what you call them. The IRS and the CRA both publish guidance, and getting it wrong can mean back taxes and penalties.
Gross to net
Gross pay is what the employee earned: hours times rate, or the salary for the period, plus overtime, bonuses and commissions. Net pay is what they take home after withholdings. The employer holds the withholdings in trust and sends them to the government, along with the employer's own share of payroll taxes.
United States: the 2026 figures
| Item | Employee | Employer |
|---|---|---|
| Federal income tax | Withheld per Form W-4 and IRS Publication 15-T | None |
| Social Security | 6.2% of wages up to $184,500 | 6.2% matching |
| Medicare | 1.45% of all wages, plus 0.9% Additional Medicare Tax withheld on wages over $200,000 | 1.45% matching (no match on the 0.9%) |
| Federal unemployment (FUTA) | None | 6.0% of the first $7,000 per employee, usually 0.6% after the state credit |
| State unemployment (SUTA) | None in most states | Your state's rate on its wage base |
| State and local income tax | Most states, some cities | None |
US worked example
Jordan earns $1,000.00 gross for the week. For this example, assume federal income tax withholding from the Publication 15-T tables comes to $80.00 (the real figure depends on Jordan's W-4) and ignore state tax.
| Amount | |
|---|---|
| Gross pay | $1,000.00 |
| Federal income tax withheld (example) | −$80.00 |
| Social Security, 6.2% | −$62.00 |
| Medicare, 1.45% | −$14.50 |
| Net pay | $843.50 |
The employer also owes $62.00 Social Security and $14.50 Medicare of its own, $76.50 in total, plus FUTA and SUTA (left out here to keep the example short).
| Account | Debit | Credit |
|---|---|---|
| Wages expense | $1,000.00 | |
| Payroll tax expense (employer Social Security and Medicare) | $76.50 | |
| Payroll liabilities (income tax $80.00 + employee $76.50 + employer $76.50) | $233.00 | |
| Bank (net pay) | $843.50 | |
| Totals | $1,076.50 | $1,076.50 |
When the $233.00 is deposited with the IRS, the entry is a debit to payroll liabilities and a credit to bank. The liability account then returns to zero, which is a good monthly check.
US deadlines. Federal payroll taxes are deposited electronically, monthly (by the 15th of the next month) or semiweekly, depending on how much you reported in a lookback period. Form 941 is filed quarterly, by the end of the month after each quarter. Form 940 (FUTA) is filed yearly. W-2s go to employees and the Social Security Administration by January 31; for 2026 wages that is February 1, 2027, because January 31 is a Sunday.
Canada: the 2026 figures
| Item | Employee | Employer |
|---|---|---|
| Federal and provincial income tax | Withheld per Form TD1 and the CRA's tables (T4127) | None |
| CPP | 5.95% of earnings between $3,500 and $74,600 (YMPE); maximum $4,230.45 | 5.95% matching |
| CPP2 | 4% of earnings between $74,600 and $85,000; maximum $416.00 | 4% matching |
| EI | 1.63% of insurable earnings up to $68,900; maximum $1,123.07 | 1.4 times the employee premium |
| Quebec | QPP, QPIP and Quebec income tax instead, with Revenu Québec | Employer shares plus Quebec payroll contributions |
Canadian worked example
Priya, in Ontario, earns $1,000.00 gross for the week (52 pay periods). The CPP basic exemption is spread over the year: $3,500 ÷ 52 = $67.31 per week. For this example, assume federal and Ontario income tax from the CRA tables comes to $130.00 (the real figure depends on her TD1 forms).
| Calculation | Amount | |
|---|---|---|
| Gross pay | $1,000.00 | |
| Income tax withheld (example) | −$130.00 | |
| CPP | ($1,000.00 − $67.31) × 5.95% | −$55.50 |
| EI | $1,000.00 × 1.63% | −$16.30 |
| Net pay | $798.20 |
The employer adds $55.50 CPP (matching) and $22.82 EI (1.4 × $16.30), $78.32 in total.
| Account | Debit | Credit |
|---|---|---|
| Wages expense | $1,000.00 | |
| Payroll tax expense (employer CPP and EI) | $78.32 | |
| Payroll liabilities (tax $130.00 + CPP $111.00 + EI $39.12) | $280.12 | |
| Bank (net pay) | $798.20 | |
| Totals | $1,078.32 | $1,078.32 |
Canadian deadlines. Most small employers are regular remitters and send the month's deductions and employer contributions to the CRA by the 15th of the next month (some very small employers may remit quarterly; larger ones more often). T4 slips go to employees and the CRA by the last day of February; for 2026 that is March 1, 2027. When an employee stops working, issue a Record of Employment (ROE).
Good payroll habits
- Get a W-4 (and state form) or TD1 forms from each new employee before the first pay.
- Keep timesheets and pay records: four years for US employment tax records, six years in Canada.
- Never use withheld taxes to cover cash shortfalls. Unremitted withholdings carry heavy penalties and owners can be held personally liable.
- Check each month that the payroll liabilities account goes back to zero after you remit.
Key terms
Try it
- US paycheck calculator: Work out Jordan's real withholding for any W-4.
- Canadian payroll calculator: CPP, CPP2, EI and income tax for any province.
- Employee cost calculator: The full cost of a hire, with employer taxes.
- Payroll tax rates 2026: Every rate and wage base, with sources.
Check your understanding
Pick an answer to see if it is right and why. Nothing is sent anywhere; your result is kept in this browser.
Sources
Figures as of October 25, 2026.
- IRS Publication 15 (Circular E), Employer's Tax Guide
- IRS Publication 15-T, Federal Income Tax Withholding Methods
- SSA: Contribution and benefit base
- IRS Instructions for Form 940 (FUTA)
- CRA: T4127 Payroll Deductions Formulas, 123rd edition (July 1, 2026)
- CRA: YMPE and YAMPE limits
- CRA: Remit (pay) payroll deductions and contributions
Part of Bookkeeping Basics, a free course from AcboBooks LLC. General information, not tax, legal or accounting advice. Last reviewed October 25, 2026.