Gross Pay Vs Net Pay: Understanding and Calculating the Difference
Last Updated: January 12, 2023
Errol Flynn once said:
“My problem lies in reconciling my gross habits with my net income.”
Apparently, this is quite a serious issue even for a renowned Hollywood star, let alone someone living paycheck to paycheck.
So, what is gross pay vs net pay all about? Is the difference really that significant? Which figure is larger, and how do you get one from another?
We’ll do our best to answer these and many more questions on this subject.
What Is Gross Pay?
In layman’s terms, gross pay is your earned wages before payroll deductions. In other words, it’s not the money you take home but the money that is referenced on federal and state income brackets.
There are several ways to calculate gross pay, usually per pay period. This can be weekly, bi-weekly, semi-monthly, or monthly. Most commonly, however, gross pay is calculated per work hour. In job descriptions, you’ll also often see the gross annual income listed.
Calculating your gross pay is as simple as it gets. You take your gross hourly wage and multiply it by the number of hours worked. The only thing that could disrupt this calculation is the overtime hours, which usually come with a multiplier. This is because the overtime has to be paid at a blended rate.
Moreover, employers may pay employees more than one pay rate. If you’re in an industry where you are occasionally expected to perform hazardous work, work night shifts, on weekends, you will have different hourly rates. Sometimes, employees even have different hourly rates for different types of work.
Therefore, while indicative, a gross pay example is not 100% true to the gross pay that you will actually receive.
For instance, in the military, you might get special pay in some branches. You get a submarine duty incentive pay if you’re stationed on a submarine. You may also have a different rate based on the zone of deployment and whether it’s peacetime or wartime.
So contrary to the popular belief that it is simpler than its net pay counterpart, gross pay is not always easy to figure out. You might want to use a gross pay calculator for more complex situations.
What Is Net Pay?
Net pay is the money you get to take home. So, from the perspective of an average household, when it comes to net pay vs gross pay, the former is really all that counts.
The equation is quite simple (in theory). You have your gross pay and various payroll deductions. Here, you have two types of payroll deductions:
Understanding these two types of deductions will explain why some people have a smaller discrepancy between their gross and net pay.
There are quite a few mandatory payroll deductions that may depend on your state, region, or even your marital status. They include:
- Federal income tax – A tax levied by the IRS that may range from 10% to 37%, depending on your income.
- State income tax – This can be progressive or flat. Some states have no income tax, whatsoever.
- Local tax withholdings (city, country, state disability, unemployment insurance, etc.) – These vary according to one’s zip code and could greatly contribute to the difference between gross and net pay.
- Court-ordered child support payments – They change with the child’s needs, increase or decrease in payer’s income, or the cost of living.
- Social security – This is usually 6.2% of wages, up to the taxable maximum of $142,800 (in 2021).
- Medicare taxes – They are usually 1.45% (for both the employee and the employer).
All these are deductions that you cannot (legally) avert.
The first example of voluntary payroll deductions is various premiums, like health insurance premiums for medical, dental, or even vision plans. Life insurance premiums are another example of these voluntary deductions.
Then, there’s the retirement plan or 401(k) contribution, pre-tax health savings plan, or a contribution to a flexible spending account.
These voluntary deductions are choices you make with your employer’s agreement. So, for instance, some people have short-term disability plans, tuition, and certification deductions, while others contribute to interoffice charity.
One thing is important to understand, whenever voluntary deductions are involved, they always, ALWAYS, require written authorization.
One category that is no longer relevant but still worth mentioning for those filing amended returns for years 2017 and prior is personal exemptions.
Here, you can claim exemptions for dependents, paying off your student loans, retirement savings contributions credit (savers credit), child tax credit, etc. The bulk of gross and net pay difference sometimes comes from your ability to claim these exemptions properly.
The thing worth keeping in mind is that you can only claim an exemption for yourself in a scenario where no one else claims you as a dependent on their own tax return.
In a way, personal exemptions were similar to deductions, with the major difference being that they have fewer restrictions. For instance, both spouses in a married couple could claim exemptions. The same could not be said for a deduction.
Tips for Calculating Your Net Pay
While knowing the definitions may be important from the larger scheme of things, the most essential piece of practical information is knowing how to calculate your net pay.
Ideally, you would find a take-home pay calculator and carefully insert all the relevant data in your scenario. These calculators make things easier by reducing the chance that you’ll forget something important.
One of the simplest calculators you can use is Calculator.net, which allows you to fully depict your paycheck situation by manually adding some factors while selecting others from a drop-down list.
Some people get extra creative with the use of these calculators, and they even use them to determine whether a cross-state move for a job is actually worth it.
At the very least, you want one that considers the deductions we’ve previously mentioned.
Still, you can make this estimate on your own, as well. This is really basic math, but you should still use a calculator and double-check (preferably even triple-check) everything.
The shortest version of gross pay vs net pay comparison would go something like this:
- You calculate the gross pay using your hourly rate, multipliers, and special rates.
- Once you get the final figure, you detract all the deductions
- Then, you withhold all your taxes
- Finally, you detract any court-ordered payments (like child support or penalties)
Once you do this a couple of times, you’ll be surprised at just how simple it really is. While a calculator makes things easier, even doing this the old-fashioned way (pen and paper) is not exactly rocket science. Nonetheless, in the digital era, there’s no reason for you not to take the easy way out.
Gross vs net pay is quite a simple comparison once you grasp a couple of basic concepts. To a layman, it may seem as if net pay is far more relevant for the average household, but this is not always the case.
When looking to apply for your mortgage, get a loan, or even rent a place, you’ll be asked about your gross pay. When looking for a job, gross annual pay is usually how you do a pay comparison. Your net pay, on the other hand, is the amount of money that you’ll have at your disposal.
To sum it up, your gross pay is what you are owed by your employer, while your net pay is what you actually get when you pay all that you owe to the government and various other institutions.
Calculating your net pay will be fairly simple once you know all your taxes, benefits, and other payroll deductions. This can be done via pen and paper or with a reliable gross pay vs net pay calculator.
Gross income is your total salary before any taxes or deductions are subtracted. It’s the biggest potential amount that you would get paid if you had no financial responsibilities whatsoever. By making necessary deductions, you can bring your gross pay down to net pay.
Take-home pay is synonymous with net pay. The term’s etymology is quite simple, and it’s a descriptive name for what net pay actually represents. It’s what you get to take home after you’ve detracted all the expenses, taxes, and financial obligations.
By its very nature, gross pay is higher than net pay. Seeing as how net pay is what you get after you reduce your gross pay (by all the taxes and payables that you’re due), gross pay is always a higher amount.
To calculate gross pay vs net pay, you need two things. First, you need the total record of your work hours, hourly rate, as well as instances where you were due special pay because you worked overtime, night shifts, etc. Next, you need the list of all your pay deductions. Then, you deduct all of this from your gross pay. That’s it.