Gross Pay vs Net Pay: What’s The Difference?
Many people have gross pay and net pay confused. The two are both types of profit but there is a significant difference between them. This article will explore what gross and net pay are, how they differ from each other, and why it’s important to know the difference (think savings!)
What Is Gross Pay?
Gross pay is the amount of money an employee makes before any deductions are taken from the salary. The amount of gross pay in a person’s salary package will vary depending on their job title and how much they’ve contributed over time with things like overtime hours worked.
Some people find gross pay numbers confusing because it’s not always clear which ones factor into your final paycheck when you do taxes– but all those figures come off at tax time so it shouldn’t really interfere with understanding how this number works for someone who has a traditional office-based position.
Gross Pay for Hourly Employee
The gross pay for an hourly employee is calculated by multiplying their hourly rate by the number of hours worked. Subsequently add any other income sources, including overtime, tips, and commissions.
For example, if an employee works 60 hours over the course of two weeks and only makes $18 per hour on average, then their gross pay for those two weeks would be $1080. Gross Pay is more often than not seen as a person’s total income because it doesn’t include anything that has been taken out or taxes withheld from what they’ve made.
Gross Pay for Salary Employee
You must determine the number of pay periods an employee has throughout the year before you can calculate their pay. Pay periods are the timeframes during which employees are paid. Once you know the number of payroll periods in the year, divide the annual salary of your employee by the number of those periods. The result is the amount of gross pay an employee will receive per period.
The difference between a salaried worker’s net annual income and their yearly salary can be confusing for many people, but if you know the exact formula to calculate it then doing so becomes much simpler.
Gross Pay for Self Employed
The process of self employment is beyond the scope of this article, but it’s important to mention that gross pay is also important to understand in the context of starting your own business. When you’re creating your invoices, for example, it’s important to demarcate between gross and profit – likewise when you’re creating paystubs at the end of the month (either for yourself or for your employees).
What Is Net Pay
Net Pay (sometimes called “take-home” or take-out pay) refers to how much money an individual has available after they have paid tax, deductions from their paycheck such as Social Security contributions, or other types of insurance premiums. To find Net Pay on your paycheck stubs, simply subtract all taxes withheld plus any pre-tax deductions including health care costs from Gross Salary. The resulting number reflects what remains in your check after payroll withholdings.
How to Calculate Net Pay
Calculate your taxable income by subtracting your voluntary deductions and retirement contributions from your gross pay. The net pay is then determined by subtracting all taxes (both federal and state) from the taxable income. Net pay is also known as the “bottom line” because it is the bottom number on an income statement.
Net Pay = $(Gross Salary) – ($Taxes [%]) * $(Gross Earnings)
Why It’s Important To Know The Difference Between Gross & Net Pay
Knowing the difference between gross income and net income helps you prepare for your financial decisions in life by being aware of how much money will be available for day-to-day expenses. Through this, you can create a budget that matches the kind of lifestyle you are aiming for.
PayStubsNow: A useful tool for businesses
PayStubsNow helps hundreds of companies around the world by generating invoices, making paystubs for employees, and assisting with various tax documents. In comparison to traditional invoicing, our service is faster, cheaper, and better. Whether you have an e-commerce company or a brick-and-mortar shop, PayStubsNow is the company for you.
FAQ: What is Revenue?
Revenue is the income generated by a company through its various business activities. It can be divided into two categories: operating revenue and sales/revenues from investments or other sources of funds (i.e., debt financing, stock offerings).
What deductions can I expect to come out of my paycheck?
Deductions may be taken from your paycheck for a variety of reasons. A number of them are mandatory, such as State and Federal income taxes, social security taxes, Medicare, agency shop fees, and retirement contributions. The amount of other deductions is dependent upon your enrollment in benefit programs and other choices. These include, for instance, health insurance premiums, savings bond or credit union deductions, and United Way (SEFA) contributions.