There is often confusion when it comes to terms like Gross and Net Pay. In part, this is because the average person does not deal with these terms on a regular basis. Let’s take a quick look at the difference.
Gross Pay
Gross pay is the total money that your employer pays you in wages.
If you are paid a salary, e.g., $2,500 a month, that is your gross salary or gross pay. Another way to calculate it is if you earn $30,000 a year in salary and are paid every 2 weeks, divide the annual salary by 26 to determine your gross salary for any pay period. In this case, it would be $30,000/26 = $1,153.85 per check.
If you are paid hourly, your gross pay is the hours you worked during any pay period times the hourly rate of pay you receive. For example, if you earn $10 per hour and work 80 hours during a pay period, your gross pay is $800. Gross pay does not include any payment you receive for overtime, bonuses, or reimbursements for approved expenses.
Now, there will be deductions from your gross pay from every paycheck. These include deductions for state and federal taxes, Medicare, and Social Security. Your employer will also deduct any voluntary deductions from your gross pay. Voluntary deductions usually include any health insurance coverage contributions. If you have been subject to a court-ordered garnishment, e.g., back taxes due to the IRS, these will be deducted as required by law.
You have your net pay after all your required and voluntary deductions are subtracted.
Related Reading: Salary Calculator for United States
Net Pay
As stated above, your net pay is the amount of money you receive from your employer after all deductions have been made. In other words, the amount you see on your check.
If you are on a salary, your net pay is the amount of the gross pay ($1,153.85 using the example above plus any overtime pay, bonuses, and reimbursements) minus all taxes and deductions.
If you are paid hourly, your net pay is the amount of your gross pay (all the hours you worked at your regular rate plus any hours you worked on an overtime rate and bonuses or reimbursements) minus all taxes and deductions.
Sometimes, these terms are also called Gross Income and Net Income, but you should stick with Gross Pay and Net Pay because these other terms of Gross Income and Net Income are often used for ANNUAL calculations and are referred to by tax agencies in this manner as well.
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