Gross Pay Vs. Net Pay

Whether you receive a fixed annual salary or hourly wages at your job, you may notice two figures on your payslip.

These figures are commonly known as gross pay and net pay. Understanding the difference between the two is essential when making crucial financial decisions and determining why you take home the amount of money you do. 

This post will discuss gross and net pay differences and how they affect your payslip.

What Is Gross Pay? 

Gross pay or gross wages is the total amount of money an employee earns before subtracting payroll deductions and taxes.

This is the figure that the employer indicates on the employment contract. For instance, if the employer has offered to pay you an annual salary of $60,000, you will earn $60,000 in gross pay. 

Gross pay is the amount on your payslip before all deductions. This amount can either be a fixed set salary or a multiplication of the hourly wage rate with the number of working hours. For instance, if the employer agrees to pay you $20 per hour and you work for 40 hours a week, your weekly gross pay will amount to $800. 

Even though your gross pay will not appear in your bank account, it is helpful to understand its meaning. The amount deducted from your gross depends on your location and the company. 

The most common deductions taken from your gross pay are:

• Taxes: Income taxes and other relevant national or local government taxes will be subtracted from your gross pay before the money reaches your bank account. 
• Insurance: In most countries, employees must contribute to the national health fund. The employer may also deduct other insurance payments such as disability, social security, and unemployment insurance. 
• Pension or retirement plan contribution: Your employer may also deduct a percentage of gross pay towards your pension or retirement plan. In some countries, the employer and employee contribute the same amount towards the latter's retirement plan savings scheme. 
• Bonus payments: Employers include bonuses and other incentives on the employee's payslip to show appreciation for their excellent work. However, these bonuses are subject to taxation in many countries. 
• Student loan payments: Some countries mandate that all employers deduct student loan payments from employees' gross pay. 

What Is Net Pay? 

Net pay is the money an employee receives in their bank account after taxes, optional contributions, and other deductions have been subtracted. However, net pay may also equal gross pay if income tax is negligible or the employee's salary is below the government's taxation bracket. 

Net pay is more important than gross pay since it guides employees' financial activities. You should continuously monitor your net income and inform your employer if new developments exempt you from some deductions. 

How to Calculate Gross Pay and Net Pay 

Here is a step-by-step guide on how to calculate your gross pay and net pay:

Calculate your gross pay 

If you're a salaried employee, your gross will be your annual salary divided by the stipulated pay periods. For instance, if your annual salary is $84,000 and you're paid monthly, your monthly gross pay will be $7,000. 

On the other hand, if you're paid hourly, you will calculate your gross pay by multiplying the agreed hourly rate by the total number of hours you worked in a week or month. 

For instance, if you are paid $25 per hour and work 40 hours a week, your weekly gross pay will be $1,000. 

• ‍Account for all mandatory and voluntary deductions 

Your country of employment will determine the required deductions from your gross pay. The mandatory deductions include income tax, retirement plan payments, health care premiums, and social security contributions. The voluntary deductions from your gross salary will depend on your preference. 

• ‍Subtract total deductions from your gross pay to get your full net income

To compute your net income, sum up all the mandatory and voluntary conclusions and subtract them from your gross revenue. 

‍Differences Between Gross Pay and Net Pay 

The following are the noteworthy differences between gross pay and net pay:

• Gross pay is always higher than net pay.
• Gross pay accounts for all benefits paid by the employer to the employee, including overtime pay, holiday pay, and bonuses. On the other hand, net income is exclusive of all benefits.
• Gross pay comprises net salary, retrials, and income tax, while net pay is the money the employee receives after every payday. 
• Gross salary comes from the cost to the company (CTC), while net pay comes from gross income after subtracting taxes and deductions. 

How Gross Pay and Net Pay Affect the Payslip 

Gross pay is the highest figure that shows up on the top of your payslip. The salary you and your employer agreed upon in the employment contract. Interestingly, net pay is in a bigger font on your payslip after subtracting all deductions from your gross pay.

Net pay is a lower figure than gross pay and is the amount of money you receive in your bank account on payday.  

Gross-Up

Gross-up refers to the amount of money an employer adds to the employee's payment to cover the income taxes that the latter will owe for that payment. Gross-up pay helps the employer relieve themselves of any tax liability with bonuses or relocation expenses. 

For instance, if relocation expenses comprise $6,000 of taxable income, the employer may pay the employee $9,000 to receive the full benefit of $6,000 and relocation expenses amounting to $3,000.  

Summing Up 

The gross and net pay concepts are essential in computing a company's payroll. Therefore, you need to understand the differences to help you manage your company's finances appropriately.