Who doesn’t look forward to payday? It’s a day that everyone wishes could come around more often as most plan their lives around it. The necessities in life like food, water, and shelter are all reliant on this special day where you claim the rewards of your labor.

However, it is important to understand the differences between gross pay and net pay to plan your monthly budget accordingly. These two types of pay have significant differences that can affect your financials if you aren’t aware of them.

Gross Pay Defined

You more than likely have seen job listings that post the amount of money they are willing to pay for that position. If a posting has one listed with a $60,000 salary, this is your gross pay. In other words, it is your pay before any taxes or deductions are taken out of your paycheck.

As you soon come to realize, gross pay is always larger than your net pay. How gross pay is calculated depends entirely on the job:

Gross pay for the hourly employee

This is relatively straightforward as you calculate the gross pay for an hourly employee by simply multiplying the hours worked by their pay. For a quick example, if an employee gets paid $20 per hour and worked 36 hours for the week, their gross pay would be $720 for the week (20 x 36 = 720).

The employer also needs to add any tips, overtime, or any other forms of income to the paycheck as well.

Gross pay for a salaried employee

Going back to the $60,000 salary job listing, that would be their yearly gross pay. However, the employer needs to figure out how many pay periods will be throughout the year to determine how much each paycheck will be.

If the employer decides to enact a bi-weekly payment system, it would simply be $60,000 divided by 24 (12 months times 2). This employee’s gross payment every paycheck would be $2,500 every two weeks.

Gross pay for the self-employed

The self-employed have many factors that can make it confusing at times. Understanding the differences between these two types of payments can prevent you from getting headaches in the future.

By utilizing tools you can find online, you can seamlessly calculate your gross and net pay by generating your own customizable checkstubs. Accurate paystubs, whether for yourself or your employees, help demonstrate the clear difference between gross income and net pay.

Net Pay Defined

As you probably have figured out by now, net pay is the amount you can actually deposit into your bank account. After all the taxes and deductions, you are left with your net pay. Commonly referred to as your “take home” pay, this can be easily calculated by subtracting taxes (federal and state), Medicare, and Social Security from your gross pay.

If you are calculating this yourself, it is important to get this information as accurate as possible since the IRS isn’t known for their forgiveness. Using a paystub calculator is the smart choice since everything is calculated instantaneously and accurately.

Understanding the Clear Difference Between Gross Pay and Net Pay

If the concept of gross pay vs. net pay still seems a bit convoluted to you, on your next payday examine your check stub. Gross Earning and Net Pay should be marked so you can see the difference between the two.

Near the bottom, you should also notice it keeps track of how much gross income you’ve earned so far this year (YTD Gross), the total amount of deductions (YTD Deductions), and your total amount of net pay for the year so far (YTD Net Pay).