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Gross Pay vs. Net Pay: What’s the Difference?
Written by Stephanie Glanville
Stephanie Glanville is the Marketing Manager of TaxBandits. She has several years of experience with IRS tax forms and the funtionality of TaxBandits. With a passion to help business owners better understand their IRS tax forms and filing, she aims to create content that is valuable and informative.
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Generally, Gross pay and Net pay are two important factors in the payroll process. These are the terms that appear in paychecks. Knowing the terms in detail helps you manage the payroll process more effectively. Keep reading to understand in-depth about these terms.
What is Gross Pay
Gross pay is an employee's total wage before taxes, benefits, and other payroll deductions. In other words, Gross pay is considered as monthly or yearly pay before any deductions. It is the combination of basic pay and other earnings. It is the baseline for calculating the overall compensation of the employee.
Basic components of gross pay
To calculate gross pay you must understand the essential components of gross pay. Major components
of gross pay are
- Basic pay(Regular earnings)
- Other earnings
Basic pay(Regular earnings)
Basic salary is the amount earned by an employee before any particular deductions made to them. It is the fixed amount paid to the employee and does not contain any type of deductions.
Other Earnings
Additional benefits included in gross pay are listed below
- Overtime - Overtime pay is the extra amount paid to employees when they work more than the usual working hours.
- Tips - Tip is the money offered by the customer to the employee for the services rendered to them. Tips always belong to employees, not employers.
- Bonuses - Bonuses are extra pay provided to employees based on the company's growth. Most probably, it is provided once a year.
- Commissions - Commission refers to the compensation paid to the employees after the completion of a task. Most of the businesses provide commissions to motivate the employees.
What are payroll Deductions?
Deduction is the expenses that are subtracted from the employee's wages. Whenever this deduction occurs, it automatically lowers the wages of an employee.
Types of payroll deductions
For payroll purposes, deductions can be classified into two major types
- Voluntary deductions
- Involuntary deductions
Voluntary deductions
Voluntary deductions are not based on laws. With the employee's consent, a certain amount is deducted from the employee's salary. employee must elect themselves to take part in such deductions. some of the voluntary deductions are
- Health Insurance premiums
- Dental Insurance premiums
- Health Savings Accounts
- Flexible Spending Accounts (Medical)
- Retirement Plan 401K for Non-Exempt Organisations.
- Retirement Plan 403 b for Exempt Organization
- Retirement Plan 401K Roth
- Simple IRA plan
Involuntary deductions
Involuntary deductions are based on federal and state laws. It is mandated for every employer to withhold and remit sums to satisfy the debts offered by federal and state laws. some of the involuntary taxes are
- Social Security tax
- Medicare tax
- Federal Income Tax Withholding
- State Income Tax Withholding
- Wage Garnishments
What do you mean by Reimbursement?
Reimbursement is the extra benefits offered by employers to employees. Employees who spend their own money for business-related purposes can claim their reimbursements. some of the common reimbursements include
- Business travel
- Education expense
- Professional due
- Tools and supplies used at work
How To Calculate Gross Pay?
In order to calculate gross pay, basic pay, and other earnings should be added.
Gross pay = Basic pay + other earnings
Gross pay varies for hourly employees and salaried employees. The complete guide to calculate the gross pay for hourly and salaried employees is mentioned below.
-
For Hourly Employees
Gross pay for hourly employees can be calculated by multiplying the hourly wages by several number of hours worked. If the employee works more than 40 hours, it is considered as overtime pay.
Gross pay(Hourly) = Hourly wages * number of hours worked
Example:
Gross pay for hourly employees without overtime can be calculated as follows
$15 x 40 hours = $600
Gross pay for hourly employees with overtime can be calculated as follows
($15 (1.5)) x 5 overtime hours = $112.50
Total gross pay for hourly employees
Gross Pay: $712.50
-
For Salaried Employees
Gross pay for salaried employees can be calculated by dividing the annual salary by the number of pay periods in a year.
Gross pay(salaried) = Annual income/No.of.pay period
For example: if somebody earns an annual pay of $36,000 with a monthly pay period then the gross pay is $3000.
What Is Net Pay?
Net pay is the total employee earnings after subtracting all the deductions from their regular earnings. It is the leftover amount after all the deductions. This is the final amount credited to the employee's bank account. Comparatively, net pay is lower than gross pay because of the following deductions federal and state income tax withholdings, wage garnishments, health insurance, retirement savings, and other voluntary deductions. It is otherwise called
take-home pay.
How To Calculate Net Pay?
Net pay can be calculated by subtracting the deductions and taxes from the gross pay. Additionally, any reimbursement is applicable for the employee it is added to the net pay. Once you know about the deductions you can easily apply them in the formulae.
Net Pay = Gross pay – Deduction – Taxes + Reimbursement
Scenario
Consider the scenario to calculate the net pay of an employee. Let's assume Employee "Michale" is working in the "ABC Company" which is one of the startup companies in South Carolina, his gross salary is $9000 and the pay period is 1st of every month. Let's calculate the net pay
Note:
- The federal and state income tax may vary sometimes. The values mentioned in the scenario are approximate.
- State Unemployment Tax Act(SUTA) for South Carolina ranges from 0.6%(Min) to 5.46%(Max). As the above-mentioned company is a Startup SUTA tax rate is considered as 0.6%.
Gross salary of Michale = $9000
| Employee Deductions | Employer Deductions |
|---|---|
Employee’s share of Social Security Tax: $558 (6.2% of $9000) |
Employer's Share of Social Security Tax(6.2% of $9000)= $558 |
|
Employee’s share of Medicare Tax: $130.5(1.45% of $9000) |
Employer's Share of Medicare Tax(1.45% of $9000)=$130.5 |
| Federal Income Tax: $1335.04 | Federal Unemployment Tax (FUTA)(0.6% of $7000)=$42 (FUTA limits are fixed) |
| State Income Tax: $45.63 | State Unemployment Tax (SUTA)(0.6 % of $9000)=$54 (SUTA limits vary based on states and their business) |
| Total employee deductions: $2,069.17 | Total employer deductions: $784 |
Net pay = ($9000 - $2069.17) = $6,930.83
What is the difference between Gross pay and Net pay?
| GROSS PAY | NET PAY |
|---|---|
| Gross pay is the total amount earned by an individual before the removal of deductions. | Net pay is the amount earned by an individual after the removal of all deductions. |
| It is greater than the net pay. | It is lower compared to the gross pay. |
| It refers to the total wages of an employee. | It refers to the take-home pay of an employee. |
|
Formula Gross pay = Basic pay + other earnings. |
Formula Net pay = Gross pay – Deduction – Taxes + Reimbursement. |
Frequently Asked Questions
To calculate net pay, it is mandatory to know about the gross pay and the total deductions such as taxes, extra benefits, and other payroll deductions.
Net Pay = Gross pay – Deduction – Taxes + Reimbursement
In most of the cases, Gross pay is typically larger, because it is the whole amount before the deductions are taken out. Whereas, net pay is lesser compared to gross pay where the deductions are taken out from the gross pay.
Gross pay is the pay which is given by the employers which includes taxes, extra benefits, and other payroll deductions. This is considered to be the total amount earned by employees. Gross pay should be paid by employers.
Gross income should be higher compared to the employee's salary as the employees earn commissions, reimbursements, or bonuses throughout the year.
To calculate the monthly net income, firstly you should know your gross pay and subtract the deductions (Voluntary, and involuntary deductions)
Net Pay = Gross pay – Deduction – Taxes + Reimbursement