What is the difference between gross pay and net pay?
When it comes to paychecks and paystubs, two of the most important terms to know are gross pay and net pay. Someone may make $60,000 a year, but this doesn’t mean that they will take home all of that money. This is where the difference between gross pay vs net pay begins.
Gross Pay: Gross pay is the total amount someone makes before deductions and taxes are taken out of the paycheck.
Net Pay: Net Pay is the amount of money that remains after taxes and deductions are taken. This is the amount of money that employees take home.
The most noticeable difference between gross and net pay is that gross pay will always be a larger number than net pay. When looking at a pay stub, most of the time, the net pay will be listed in a larger font compared to the gross pay making it easier for employees to easily understand what their take-home pay for that pay period will be. When adding the gross pay for all of the pay periods within a fiscal year is what is used to calculate gross income. Net income is calculated the same way by summing the total net pay for each pay period within a fiscal year, totaling the amount of take-home income an employee will make.
Common Gross Pay Deductions
Gross pay vs net pay can be easily shown by the number before deductions, and the number that is left after these deductions have been taken out. The most common deduction any working individual will find coming from their gross pay is federal income tax deductions. The federal government will always take a portion of every paycheck you earn as long as you are working. The amount of money deducted from your paycheck will always fluctuate depending on the total amount of gross pay employees make, the more you make, the larger the deduction will be. The way that this deduction is derived is dependent upon which federal tax bracket you fall into. The federal tax brackets for 2020 are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Within each bracket is a range of gross income that fluctuates each year, it is important to always know which tax bracket you fall into to know how much federal income tax you can expect to be deducted from each paycheck.
The next most common deduction is state income tax. That being said, only 41 states have a state income tax. If you are a resident of Alaska, Florida, Nevada, South Dakota, Texas, New Hampshire, Washington, Wyoming, and Tennessee, you are one of the lucky ones who will not have state income tax deducted from your gross pay.
Social Security, like federal income tax, is one of the deductions that every working individual in the United States contributes to from each paycheck. In 2020 the social security wage limit is $137,700, and with the social security percentage being 6.2%, you will never contribute more than $8,537.40 in social security deduction this year.
Medicare is the third required deduction that is paid by everyone. The percentage taken from each paycheck is 1.45%, this is the standard percentage that is deducted from each paycheck and this percentage doesn’t change if someone was to make more or less money.
Calculating Gross Pay
Calculating the gross pay for hourly employees is as simple as taking the number of hours the employee worked in one week and multiplying it by their hourly rate.
- For example, if Karen works 40 hours per week and her hourly rate is $20, a simple calculation is done by taking (40 hours X $20) results in $800 gross pay for Karen that week
Depending on how many pay periods exist within your workplace, the next step is to calculate the gross pay for each week in one pay period, then sum them to get the total gross pay for the employee in that current pay period. Calculating the gross pay for an hourly employee is as simple as that.
Salaried employees are a little more complicated to calculate gross pay for but it is doable. The first thing to know when calculating the gross pay of a salaried employee is to know what the pay period is for that specific employee. The most common pay periods being weekly, bi-weekly, semi-monthly, and monthly.
- For example, if Jill makes $100,000 per year and is paid semi-monthly, Jill’s gross pay for each paycheck would be calculated by ($100,000/24) resulting in $4167 gross pay for each pay period.
Where there is not a difference between gross pay and net pay when it comes to calculating net pay by applying deductions to both salaried and hourly employees paychecks. Regardless of if an employee is paid hourly or by salary, there will always be some kind of deductions.
Calculating Net Pay
Deductions are the biggest way to differentiate between gross pay vs net pay. The easiest way to calculate net pay is by doing it in two steps, the first being calculating all the voluntary pre-tax deductions an employee has elected to have. Two of the most common voluntary deductions to see on an employee’s paycheck are for retirement and healthcare benefits. The first thing that needs to be done is to calculate taxable gross pay.
- Using Jill’s gross pay of $4167 we calculated before, the next step is to take the voluntary deduction out of it. If Jill’s retirement and healthcare deductions are $300 and $200 respectively, Jill’s net pay after voluntary deductions is $3667. The exact same process is used to calculate the taxable gross pay after voluntary deductions for hourly employees as well.
The second step to calculating net pay is calculating the mandatory deductions that every working person in the United States pays out of each paycheck and taking them from the taxable gross pay we just calculated. As we discussed previously, two of the deductions every working American pays are Social Security and Medicare.
- Knowing that the percentage taken from each paycheck for Social Security and Medicare are 6.2% and 1.45% we know that the amount we will be taking out of Jill’s taxable income is $227.35 for Social Security and $48.8 for Medicare. This brings Jill’s net income to $3090.85 for the pay period, this is the money Jill pockets and can use how she wants.
Gross pay vs net pay seems like a complicated topic, but in reality, it is quite simple. The difference between gross pay and net pay is simply that gross pay is what an employee earns before taxes and deductions, and net pay is what the employee takes home after taxes and deductions have been taken out of their gross pay.
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