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The Difference Between Gross and Net Pay

If you’ve ever wondered why your gross pay is higher on your paycheck than the amount that shows up in your banking account, you’re certainly not alone. The answer lies in understanding the difference between gross pay and net pay.

These payroll terms explain the total amount of money you earn versus the amount of money you take home after deductions. Let’s take a closer look at the difference between gross and net pay and how these amounts are calculated.

What Is Gross Pay?

Gross pay is the amount of money you (or your employee) make before any deductions or taxes are taken out of the paycheck. So, if you have a yearly salary of $50,000, that’s your gross pay or total pay. It’ll show up on your paycheck under a section labeled gross earnings. This shows how much you earned in total for the current pay period (which can be weekly, biweekly, monthly, etc.) and year to date.

And if you’re a business owner, gross pay also applies to your business, and it’s called gross income. Gross income is calculated by subtracting your business expenses (like taxes, utilities and other operation costs) from your total revenue.

How to Calculate Gross Pay

Okay, great—you’ve found the gross pay area of your paycheck and have an idea of what that amount looks like each check. Now, how is that payment calculated? To figure out your gross pay as a salaried employee, take your annual salary and divide it by the number of pay periods in one year. If you make $50,000 a year, here’s how your gross pay will shake out per pay period:

Pay Schedule

Pay Periods

Gross Pay (Per Paycheck)

Weekly

52

$961.54

Biweekly

26

$1,923.08

Semimonthly

24

$2,083.33

Monthly

12

$4,166.67

To calculate your gross income when you’re paid hourly, count the number of hours you worked and multiply that by your hourly pay rate. If you worked any overtime, you’ll multiply the overtime rate by your extra hours and add that number to your regular pay total.

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So, if you work 80 hours in your biweekly pay period (that’s 40 hours per week) and make $15 an hour, you’ll make a total of $1,200. And if you work five hours of overtime at $22.50 per hour, you’ll add $112.50 to your regular gross pay for a grand total of $1,312.50.

Deductions From Gross Pay

Like I mentioned earlier, what you earn, like your total hourly wages or salary for any given pay period, is your gross pay.

Payroll deductions are wages that get withheld from, or taken out of, your total earnings. These  deductions can be used for paying taxes, contributing to employee benefits (like health insurance), and contributing to retirement accounts (like a 401(k) or Roth IRA). Some deductions, like Social Security tax, Medicare and income tax are nonnegotiable because they’re determined by the government. Other deductions, like retirement account contributions, are voluntary, and you can talk to your HR team to decide those amounts.

Here are some deductions you need to be aware of:

  • Federal income tax withholdings are calculated based on a bracket system that depends on your income.
  • State income tax withholdings are also based on your income and where you fall in the tax brackets. But some states don’t have any income tax at all. (This is one of the many perks of living in Tennessee!)
  • Social Security and Medicare taxes are also known as the Federal Insurance Contribution Act (FICA) or payroll taxes. The current tax rate for Social Security is 6.2% and Medicare is 1.45% for employees.1 (That rate is half of the tax rate for self-employed people.)
  • Wage garnishments include court-ordered payments that come directly out of an employee’s wages to pay for things like credit card debt, student loans, alimony, child support and medical bills.
  • Health insurance premiums are usually partly covered by your employer, leaving an employee to pay a monthly premium to cover the rest. Check with your HR team to learn more about your health insurance options and costs.
  • Retirement savings, like a monthly contribution to your employer’s 401(k), are usually deducted right from your paycheck out of your gross pay.

Let’s look at an example of how deductions get taken out of your gross pay.

Rebecca is married, lives in Tennessee, and is a receptionist in a doctor’s office. She makes $50,000 a year and gets paid biweekly. She has standard federal income taxes, Medicare and Social Security tax withheld from her paycheck, and she contributes 15% of her income to her 401(k). There’s no state income tax in Tennessee, so she doesn’t have to pay additional state taxes.

Gross Pay (Per Paycheck)

$1,923.08

Social Security Tax (6.2%)

-$119.23

Medicare Tax (1.45%)

-$27.88

Federal Income Tax (12%)

-$230.77

401(k) (15%)

-$288.46

Net Pay

$1,256.74

(Use this example as a guide, not an exact calculation of taxes or other payroll data.)

What Is Net Pay?

After all these taxes and deductions are withheld from your paycheck, you’ll be left with your net pay. Net pay is commonly called take-home pay, and it’s the amount of money you (or your employee) take home after taxes and deductions are taken out. This is the money you’ll actually be able to use to budget for expenses like food, utilities, shelter and transportation—and giving and saving.

Guys, if this information is new to you, I want you to keep something in mind: It’s possible for two employees who make the same salary or hourly rate to have different net pays. This is because retirement contributions, tax filings (like claiming dependents or being married or single), and other factors (like alimony or child support payments) will change depending on the person.

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If you’re looking at your paycheck thinking, I’d like to make more gross pay, download my free Resumé Guide so you can land a new job. This guide will help you get noticed! You’ll learn how to create a unique resumé to grab a hiring manager’s attention, land an interview, and take the next step on your path to doing work that matters.

Ken Coleman

About the author

Ken Coleman

Ken Coleman is America’s Career Coach and author of the national bestselling book From Paycheck to Purpose and the #1 national bestseller The Proximity Principle. He hosts The Ken Coleman Show, a nationally syndicated, caller-driven show that helps listeners discover what they were born to do. Ken makes regular appearances on Fox News, and he co-hosts The Ramsey Show, the second-largest talk show in the nation with 18 million weekly listeners. Through his speaking, broadcasting and syndicated columns, Ken gives people expert career advice, providing strategic steps to grow professionally, land their dream job, and get promoted. Learn More.

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