Gross pay and net pay refer to an employee’s earnings, which is why people may confuse the two. The main difference is that gross pay includes earnings before deductions, while net pay is what remains after deductions.
Read on to learn more about gross and net pay, what they include, and how they’re calculated.
- Gross pay includes the salary before any deductions.
- Net pay is the amount employees receive after deductions have been made.
- Deductions can be voluntary or involuntary.
- Deductions usually include tax, retirement contributions, insurance premiums, etc.
What is gross pay?
Gross pay or gross salary is the total amount an employee earns before deductions. So, it presents the salary you pay your employees (incl. overtime pay and bonuses), plus tax amount, and benefits.
Certified public accountant (CPA) Levon Galstian, whom we spoke to, defines gross pay like this:
“Gross pay includes salary, hourly wage, reimbursements, bonuses, commissions, and overtime pay. To calculate gross pay, any commission, reimbursement, or bonuses owed to the employee should be added to their wages.”
Simply put, gross pay is the salary you agreed upon with your employee and includes wages, overtime, bonuses, and benefits.
How to calculate gross pay
To create a compensation plan for your employees, you need to determine gross pay. Calculating the gross pay is quite straightforward, as it presents the salary you agreed with your employee.
Gross pay includes an employee’s:
- Hourly wage or salary,
- Overtime,
- Bonuses, and
- Additional reimbursements for work-related expenses (think travel and uniform allowance).
The exact steps for calculating gross pay depend on whether you’re paying hourly or a fixed salary.
How to calculate gross wages for hourly workers
Here’s a simple formula for calculating gross pay for hourly employees:
Gross pay = Hourly rate × Hours worked + (Overtime + Bonuses + Taxes + Retirement contributions + Health insurance)
To simplify the calculation, you can use a time card calculator to determine pay based on regular hours worked and overtime.
CPA Levon Galstian gave us a step-by-step guide to calculating gross wage per hour:
- Multiply the hourly wage by the number of regular hours worked within a pay period (that’s how often you pay your employees), and
- Include the overtime pay rate for the extra hours (this applies to non-exempt employees).
Let’s take a software engineer from the United States as an example. The average hourly wage for a software engineer in the US is $51. Let’s also assume this employee is paid weekly — they worked 40 regular hours and 2 hours of overtime the previous week.
We’ll first calculate the regular earnings. So, multiply the regular rate ($51) by the number of regular workweek hours (40 in this case):
$51 x 40 = $2,040
For a non-exempt employee, the FLSA rules for overtime apply. Thus, the hourly overtime rate will be one and a half (1.5) times the employee’s regular rate:
$51 x 1.5 = $76.5
You can even use an overtime calculator to help you determine overtime pay accurately.
Next, since this employee worked 2 overtime hours, you have to multiply the overtime rate ($76.5) by the number of overtime hours (2 hours) to get the weekly overtime earnings:
$76.5 x 2 = $153
Once you calculate both regular and overtime earnings, the calculation will look like this:
$2,040 + $153 = $2,193
So, the gross pay for that week is $2,193.
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How to calculate gross earnings for salaried workers
Our expert interlocutor, Levon Galstian, also provided us with a process for calculating gross earnings based on the annual salary. To get gross earnings for salaried workers, you should “divide the annual salary by the number of pay periods in a year.”
There are 4 common payment frequency schemes:
- Weekly,
- Bi-weekly,
- Semi-monthly, and
- Monthly.
Out of these 4 payment schedules, 45.7% of US employees are paid bi-weekly.
If you pay your employees once a week, there will be 52 pay periods (53 in a leap year). So, to calculate employees’ weekly earnings, divide their annual earnings by 52 (or 53).
Likewise, paying bi-weekly means you’ll have 26 pay periods (27 in a leap year).
Also, employees who receive a salary twice a month will have 24 pay periods, while those who are paid monthly should divide their annual earnings by 12.
| Payment schedule | Number of pay periods per year |
| Weekly | 52 (or 53 for leap years) |
| Bi-weekly | 26 (or 27 for leap years) |
| Semi-monthly | 24 |
| Monthly | 12 |
Let’s assume your employee’s annual salary is $72,000 and they’re paid semi-monthly (twice a month). Their semi-monthly gross salary will be:
$72,000 / 24 = $3,000
What is net pay?
Net pay is the salary workers actually receive. It’s also called take-home pay and represents employees’ total earnings after all deductions.
For the principal accountant of an accounting firm, Brett Willmot, net pay is:
“The amount of money that an employee takes home after all deductions have been made. It is the total amount of money that an employee earns after all taxes, benefits, and other deductions have been subtracted from the gross pay.”
On a similar note, the founder of another accounting firm, Wendy Ha, helped us understand the importance of knowing our net pay:
“The reason why there is a net pay is that there are different types of deductions that are taken off from the paycheck and remitted to different parties (i.e., government, unions, etc.). At times, the government/unions rather have the business owner deduct these taxes/fees and remit to them directly, as opposed to each individual themselves.”
How to calculate net pay
To calculate net pay, subtract taxes and deductions from the gross pay. The formula is:
Net pay = Gross pay – Taxes – Deductions
Employees in the US may notice 2 types of deductions in their paychecks:
- Mandatory deductions, and
- Voluntary deductions.
Mandatory (involuntary) deductions are made in accordance with the law. For US citizens, involuntary deductions include:
- Withholding of federal, state, and local income taxes (certain states don’t impose state or/and local income taxes),
- Deduction for US social security taxes, Foreign service retirement, Civil service retirement, Federal Employees’ Group Basic Life Insurance (FEGLI), Federal Employees Health Benefits (FEHB), and
- Court-ordered garnishments and bankruptcy payments.
Garnishments represent additional deductions and vary from employee to employee. They usually include student loans, credit card loans, and unpaid child support.
On the other hand, voluntary deductions are those that employees can opt out of. For US workers, voluntary deductions include:
- Dental insurance,
- Retirement plan,
- Savings plan,
- Optional life insurance,
- Loan repayment,
- Long-term care program, or
- Other optional programs.
Some deductions are pre-tax, while others are subtracted after taxes.
Pre-tax deductions apply to the full amount of the gross pay. Pre-tax deductions include certain health insurance premiums and 401(k). Simply put, a 401(k) is a savings and retirement plan that workers contribute to from their wages.
On the other hand, post-tax deductions are those taken from the amount that remains after pre-tax deductions and taxes. Post-tax deductions typically consist of disability insurance or garnishments.
What to include in the net pay calculation
Calculating net pay can look different based on various factors, including:
- Tax regulations in your state (state and local income taxes),
- Employee’s filing status (single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child),
- Voluntary payments the employee signed up for (e.g., retirement contributions), and other factors.
In general, there are a few initial steps in the net pay calculation:
- Subtract pre-tax deductions from the gross pay first (non-taxable items such as retirement plans, health insurance, etc),
- Subtract federal income taxes (federal withholding — depends on the information you provide on Form W–4 and FICA withholding — Social Security taxes 6.2% of the gross wages and Medicare taxes 1.45% of the gross wages),
- Subtract state income taxes (different in each state — some states don’t even impose state income taxes — and depend on the individual’s income and filing status), and
- Subtract local income taxes (not applicable to all states).
Then, you’ll need to subtract post-tax deductions from the total amount to get the final net pay.
To clarify further, tax manager Varsha Subramanian provides 3 employee examples and a table to illustrate the process for calculating net pay. In her example, paycheck deductions include 401(k), health insurance, and federal and state income taxes.
| Particulars | Gross pay | 401(k) deductions | Health insurance deductions | Federal income tax | State income tax | Take-home (net) pay |
| Employee 1 | $600 | $100 | $50 | $90 | $30 | $330 |
| Employee 2 | $800 | $150 | $80 | $120 | $40 | $410 |
| Employee 3 | $1,000 | $200 | $180 | $180 | $60 | $380 |
Gross vs. net pay: Key differences
Both gross and net pay determine an employee’s salary. The main difference between these 2 terms is that net pay is a worker’s take-home pay, while gross salary is the amount an employee earns before deductions.
| Gross pay | Net pay |
| Gross pay is the entire amount an employee earns. | Net pay is the amount an employee receives after deductions. |
| Gross pay includes base salary, overtime pay, bonuses, insurance premiums, and retirement contributions. | Net pay includes base salary, overtime pay, and bonuses. |
| The gross pay amount is typically used when negotiating pay with an employee. | The net amount is the disposable income the employee uses for personal spending and savings. |
| The employer deducts tax, health insurance, retirement contributions, and similar benefits before paying the employee. | The employee sees the net amount in their bank account. |
Principal accountant Brett Willmot highlights how important it is to know the difference:
“The difference between gross and net pay can affect budgeting and financial planning. Gross pay is often used to determine an employee’s base salary or wages, while net pay is used to determine the actual amount of money that an employee will receive in their paycheck.”
Likewise, CPA Levon Galstian reminds us that “employers are responsible for deducting the necessary expenses from an employee’s paycheck and making payments to the appropriate accounts before issuing the check or depositing the net pay into the employee’s bank account.”
Gross/net pay vs. gross/net income
The terms gross and net pay slightly differ from gross and net income: Gross income includes all earnings before deductions. Unlike gross pay, gross income doesn’t only refer to income from employment, but also:
- Interest,
- Dividents,
- Capital gains, or
- Rental income.
Gross income determines borrowing capacity (how big a loan you can take from a financial institution), as that’s the amount that lenders look at. Moreover, it determines a person’s federal income tax bracket. It’s the first step of filing tax returns.
Net income is gross income minus deductions and taxes.
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FAQs about net pay vs. gross pay
To learn even more about the differences between net pay and gross pay, check out these frequently asked questions.
Is tax taken from gross or net?
Tax is taken from gross pay.
Is it better to be paid gross or net?
Employees always receive net pay in their bank accounts. Gross pay is the amount before deductions, so the gross amount never reaches the employee. The exception is self-employed workers who are responsible for paying their own taxes.
Should I save 20% of my gross or net pay?
If you want to save money, experts suggest calculating savings from the gross amount — with 20% a month being a commonly recommended target.
Why is my gross pay less than my net pay?
Your gross pay shouldn’t be less than your net pay — but the other way around. That’s because net pay is the amount you get after mandatory and voluntary deductions, including taxes, health insurance, and retirement contributions.
What deductions can reduce my taxes?
According to the IRS, you can lower your taxes by claiming credits and deductions when you file your tax return.
What income isn’t taxed?
Examples of nontaxable income include gifts, life insurance proceeds, child support, and workers’ compensation.
