What Is the Difference Between Gross and Net Pay?

difference between gross and net pay

It doesn’t matter if your salary comes annually or you are paid per hour. You might have come across “net pay” and “gross pay” on your paycheck. 

However, having a full grasp of what both entail will help you evaluate what your total take-home pay is.

Moreso, in situations when you appoint your first worker or settle your wages from your business, you become answerable for payroll. 

In this post, we’ll explain everything you need to know to understand the differences between gross pay and net pay, calculate each, and answer any concerns you or your workers might have about paychecks.

What Is Gross Pay?

Gross pay is defined as the amount a worker earns before all deductions are made. This includes taxes, benefits, wage additions, and any other payroll extracts.

Gross pay is written on a pay stub and typically shows in a worker’s salary or hourly wage in addition to any compensations, commissions, incentives, and overtime pay. 

For instance, should an employee work for 40 hours during a pay period and his/her pay is $2 hourly? Then the gross pay received is $800 for the pay period. 

Using another analogy, if such a worker receives a salary of $60,000 and gets paid twice monthly, then the gross pay received daily should be around $2,500.

How do we get this?

We will divide $60,000 into 24 pay periods. Now let’s analyze all that is extracted from gross pay.

What is Deducted From Gross Pay?

The reductions removed from gross pay can vary according to the country you reside in. And also the organization you work for. 

Nevertheless, here are some of the most common extracts or deductions you might notice  on your payslip:

1) Taxes. 

These are compulsory and based upon the taxation system set by governmental bodies. Hence, the amount is extracted from your gross pay. However, this is also based on the value of your entire salary. Also, this tax will be a percentage of your entire income.

2) Retirement contributions. 

This is the payment that goes into your pension, especially a percent of your gross income. 

In most countries, the deduction fees that are taken out of your salary go into your state pension. And some may give the choice to contribute to a private or an organization pension.

3) Incentives. 

These can be for a long or short period. For instance, a short-term incentive could be a bonus paid that same year after specific targets are met. A long-term incentive could span between 3 to 5 years of bonus paid either as cash, share, or equity in the company. However, it is crucial to take note that these incentives are regarded as taxable income.

4) Insurance. 

In most cases, health insurance is perceived as part of your incentive package. And as a result, it is removed from your income. This amount is dependent on where you work and the type of health insurance program present in your country of residence. Usually, insurance premiums are deducted from your income before tax.

5) Employee-specific deductions.

This happens in situations where your job demands you to wear a specific uniform or use certain tools to carry out your duty. Here, you could be entitled to an allowance toward these extra costs which is needed to be stated in your employment contract.

Note that some of these are pre-tax reductions, which implies that the money is removed from your gross income even before considering other relevant taxes, which include retirement contributions or healthcare, as the case may be. 

Moreso, there are post-tax deductions, which are sometimes removed from your net pay (which will be explained later on) or after the taxes have been applied, such as union fees or donations to charity.

How To Calculate Gross Pay

1) For hourly workers: 

To calculate this, multiply your wage per hour by the number of hours spent working during a pay period. If a nonexempt worker worked more than 40 hours a week, you will have to include the overtime pay rate for the extra hours worked. i.e. wage per hour * number of hours worked.

2) For salary employees: 

Divide the salary earned per year by the number of pay periods in a year.

In a situation whereby workers are paid monthly, that’s 12 pay periods

Twice monthly: 24 pay periods

Weekly: 52 pay periods

Biweekly: 26 pay periods. Now you should understand how we arrived at the estimate done earlier.

Furthermore, If you own your worker’s incentives, commissions, or reimbursements within a given pay period, you will need to add the amount owed to their salary. This is to get their overall gross pay.

You don’t have to calculate gross pay or net pay manually. With the help of a payroll service, the calculations will be done for you. Moreso, this payroll will send checks or make deposits into your workers’ bank accounts. Payroll services, such as ADP Run or Gusto, offer a simple approach to entering pay and deduction data into a worker’s records. Thus, the paychecks will be computed automatically at every pay period.

Now let’s move to the next term!

What Is Net Pay?

Net pay, otherwise known as take-home pay, is the amount on a worker’s paycheck after certain deductions are removed from their gross pay. These deductions include:

  • health insurance 
  • premiums
  • payroll taxes
  • income tax
  • wage attachments (incentives) and
  • other voluntary or mandatory deductions.

Additionally, as an employer, you’re accountable for removing these expenses from a worker’s paycheck. And also making payments to the appropriate accounts before issuing the check or depositing the net pay into the worker’s bank account.

How To Calculate Net Pay?

To do this, begin with the worker’s gross pay. As stated before, this depends on the number of hours worked. Alternatively, it can be calculated by dividing the salary by the number of pay periods in the year. Afterward, remove the deductions, such as:

  • Payroll (FICA) taxes
  • Court-ordered wage attachments
  • Health insurance premiums
  • 401(k) or other retirement contributions
  • Federal, state, and local income taxes, including additional withholdings stated on the worker’s W-4.

Now let’s analyze the aforementioned deductions that affect net pay.

Factors That Influence Net Pay?

1) Federal income tax withholdings

This is directly dependent on the worker’s income and it is calculated using a bracket system that rises progressively with the wage or income.

2) Health insurance premiums

Even though employers cover the larger parts of health insurance premiums, the worker will often also make some contributions to health insurance premiums each pay period.

3) Retirement savings

Contributions to some retirement plans, such as 401(k), are deducted out of gross pay.

4) Form W-4, Employee’s Withholding Certificate

This form gives information about the filing status of a worker whether single, married, or head of household), dependents, and other sources of income. Therefore, every employee needs to fill out Form W-4s before starting a new job. These details directly influence the amount of the federal income tax that will be removed each pay period.

5) State income tax allowances 

Many states adopt progressive tax brackets, similar to the federal government while others do not have income tax at all. However, certain cities might require workers to pay their income tax.

6) Social Security and Healthcare taxes

These taxes are referred to as Federal Insurance Contribution Act (FICA) or payroll taxes. Here, each worker’s contribution must be in line with that of the employer. The Social Security tax rate is 6.2% while Healthcare or Medicare is 1.45%. 

7) Wage Attachments

These attachments include credit card debt, student loan debt, child support, alimony, medical bills, and back taxes.

Note that a court can give an employer a directive to hold back a percentage of a worker’s wages to settle an incurred debt. 

What Is the Difference Between Gross and Net Pay?

The major differences between gross pay and net pay are the things deducted:

For gross pay, this entails 100% of the income or wages, compensations, commissions, and incentives a worker earns in a given pay period. 

On the other hand, Net pay features gross pay minus payroll deductions, such as taxes, benefits, and obligatory attachments. In essence, net pay is a worker’s take-home pay.

FAQS On The Difference Between Gross and Net Pay?

1) How Can I Increase My Net Pay?

Maximizing your take-home income or net pay helps you save more money and make better budgeting strategies.

However, it may also add to your tax liability. Therefore, to optimize your overall income, consider modifying your W-2 exemptions before filing your taxes for the year. Also, increasing your contributions to your 401(k) retirement account to fund your retirement can help. 

Furthermore, If you believe you have the potential to manage more advanced responsibilities, you might want to negotiate an increment with your manager or supervisor. Moreso, you can research the present market rates and leverage your expertise to convince them to improve your current salary.

2) How can I use gross and net pay to better plan my finances?

Knowing how to calculate your gross income enables you to know your taxable income. And also modify your capital gains, business returns, and retirement contributions. However, having a full grasp of how your net pay works can also aid in establishing a good monthly budget. Additionally, helps you determine the amount to allocate to some expenses, including rent, tuition or loan settlements, bills, and car payments. Furthermore, utilizing the service of a financial adviser can help you set up financial goals for yourself using your gross and net income. 

3) How Does Changing Tax Brackets Influence My Net Pay?

By increasing your gross pay, you may be able to shift to a greater tax bracket. The current tax brackets vary from 10% to 37%, with individuals receiving higher income and paying more in taxes annually.

So, If you’re in an elevated bracket, the government removes more from your paycheck, resulting in lesser net pay. 

Meanwhile, you may pay more in taxes, but the figure will likely differ depending on various segments of your income, as opposed to your total earnings.

4) Do employers pay gross or net?

Employers are answerable for a worker’s gross pay in addition to a part of their FICA taxes, and any employer-paid incentives. 

Therefore, the payment for a worker per pay period would include:

  • Gross pay
  • 7.5% for FICA taxes
  • Portion of their health insurance premium or stipend
  • Employer-sponsored retirement account contributions
  • And any other employer-paid benefits

In summary, the amount of the paycheck or deposit a worker gets after deductions is their net pay.

5) Should Gross Pay Be Equivalent To Salary?

A salary or wage is the origin of gross income, however, gross income could be more than salary in an instance whereby an employee receives more incentives, commissions, or compensations throughout the year.


To wrap up, gross pay is the amount of total reward a worker earns for working for your business. Although not the payment they receive inside their bank account every pay period. Net pay, on the contrary, is a worker’s exact take-home pay. That’s the fee they earn after payroll deductions are removed from their gross pay.

Ultimately, a worker’s wage slip should always reflect the exact amount within the pay period (gross pay). Moreso, a comprehensive analysis of deductions and the final amount received on their paycheck (net pay)


All information given in this post is not meant to replace financial advice but rather for educational purposes. Please seek the service of a licensed financial expert for any issues you may be experiencing.


  • adp.com
  • Indeed.com
  • Forbes.com
  • N26.com

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