Gross Pay Vs. Net Pay: What's The Difference? (2024)

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Dana MirandaCEPF®, Small Business Expert Writer, author of YOU DON'T NEED A BUDGET

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Dana MirandaCEPF®, Small Business Expert Writer, author of YOU DON'T NEED A BUDGET

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What Is Gross Pay?

Gross pay is the amount an employee earns before all deductions, including taxes, benefits, wage attachments and any other payroll deductions.

Gross pay is noted on a pay stub and should reflect an employee’s salary or hourly wage, plus reimbursem*nts, bonuses, commissions and overtime pay. For example, if their pay is $20 per hour and they worked 40 hours in a pay period, their gross pay should be $800 for the pay period. If they’re paid a salary of $60,000 and paid twice per month, their gross pay per pay period should be $2,500 ($60,000 divided into 24 pay periods).

How To Calculate Gross Pay

For hourly workers: Multiply the hourly wage by the number of hours worked within a pay period. If a nonexempt employee worked more than 40 hours in a week, don’t forget to include the overtime pay rate for the extra hours.
For salary workers: Divide the yearly salary by the number of pay periods in a year.
- If employees are paid monthly, that’s 12 pay periods
- Twice monthly: 24 pay periods
- Weekly: 52 pay periods
- Biweekly: 26 pay periods

If employees are owed commission, reimbursem*nts or bonuses in a given pay period, add the amount owed to their wages to get their overall gross pay.

Pro tip: You don’t have to calculate gross pay or net pay by hand. A payroll service will handle these calculations for you, in addition to sending checks or making deposits into employees’ bank accounts. Payroll services, such as ADP Run or Gusto, make it easy for you to enter pay and deduction information into an employee’s records and paychecks will be calculated automatically each pay period.

What Is Net Pay?

Net pay, or take-home pay, is the amount of an employee’s paycheck after deductions are taken out of their gross pay. Deductions include things, such as payroll taxes, income tax, health insurance premiums, retirement account contributions, wage attachments (garnishments) and other voluntary or obligatory deductions.

As an employer, you’re responsible for deducting these expenses from an employee’s paycheck and making payments to the proper accounts before cutting the check or depositing the net pay into the employee’s bank account.

How To Calculate Net Pay

To calculate an employee’s net pay, start with their gross pay based on hours worked or salary divided by the number of pay periods in the year. Then, subtract deductions, including:

Health insurance premiums
401(k) or other retirement contributions
Federal, state and local income taxes, including additional withholdings noted on their W-4
Payroll (FICA) taxes
Court-ordered wage attachments

Gross Pay vs. Net Pay: Key Differences

The key differences between gross pay vs. net pay are the items deducted:

Gross pay includes 100% of the wages, reimbursem*nts, commissions and bonuses an employee earns in a given pay period.
Net pay includes gross pay minus payroll deductions, including taxes, benefits and mandatory garnishments. Net pay is an employee’s take-home pay.

Bottom Line

Gross pay is the amount of total compensation an employee earns for working for your business, but it’s not the amount that lands in their bank account each pay period. Net pay is an employee’s actual take-home pay. It’s the amount they earn after payroll deductions are taken out of their gross pay.

An employee’s pay stub should always note exactly how much they earned in a pay period (gross pay) as well as a line-by-line detailing of their deductions and the final amount of their paycheck (net pay).

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Frequently Asked Questions (FAQs)

Do employers pay gross or net?

Employers are responsible for an employee’s gross pay plus a portion of their FICA taxes, as well as any employer-paid benefits. So, the cost of an employee per pay period would include their gross pay, plus 7.5% for FICA taxes, plus your portion of their health insurance premium or stipend if any, employer-sponsored retirement account contributions if any and any other employer-paid benefits. The amount of the paycheck or deposit the employee receives after deductions is their net pay.

What is gross income?

Gross income is the annual sum of an employee’s gross pay, such as their earnings for a year when you add up all their paychecks. It’s more than net income, which is the annual sum of an employee’s net pay—all of their take-home pay added up for the year. For tax purposes, gross income usually doesn’t include employer or employee contributions to qualified retirement plans, such as a 401(k), because these are “pretax” contributions. Some deductions, including wage garnishments, are usually included in gross income for tax purposes, as these are taxable for the payee.

Should gross pay equal salary?

The salary is a starting point for gross income, but gross income could be higher than salary if an employee earns commissions, reimbursem*nts or bonuses throughout the year.

Which is more―net pay or gross pay?

Gross pay will likely always be more than net pay because net pay includes deductions from gross pay. Gross is an employee’s total earnings, such as wages or salary, while net pay is their earnings minus payroll deductions, including taxes, benefits and garnishments. Net pay is the paycheck amount an employee takes home.

How do I calculate gross pay from net pay?

To figure out your gross pay from your net pay, you have to know how much you paid in taxes, benefits and garnishments from a given paycheck. Your net pay plus the amounts you paid in taxes, benefits and garnishments equal your gross pay. If you don’t know the exact amounts deducted from your paycheck, use an estimated tax rate between 10% and 37% to estimate your gross pay. Payroll services, such as ADP, often have net pay calculators on their sites.

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