What is the difference between gross and net pay?
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Last modified 6/3/2020 8:32:07 AM EST |
Added by 123PayStubs Team
Gross pay on a pay stub is the total wages an employee usually earns before payroll taxes and other deductions are taken out. For example, if the employee's gross pay is $50,000 for a year with a monthly pay schedule, then $50,000/12 is the gross wage for every pay period.
Whereas, net pay is the total amount of money an employer pays after deducting taxes and voluntary deductions from employee's gross wages. It is not inclusive of the tax, Medicare, or Social Security payments. In order to determine the net pay, gross pay has to be first calculated based on how the employee is employed: hourly or exempt employee. The net pay is usually less than the gross wages. Also, it is the amount that the employee receives every payday.
Net Pay = Gross Pay - Payroll Taxes - Other Deductions
Here is a list of other deductions:
- FICA taxes
- Social Security taxes
Now, let’s see how gross wages are calculated. It is usually computed based on how the employee is classified in an organization, whether the employee is employed as an hourly or salaried employee. In the case of hourly employees, gross pay is calculated by multiplying the total number of hours worked with their hourly rate and adding bonuses, overtime, tips, etc.
In the case of salaried employees, they are paid their gross pay based on the agreed-upon annual salary divided by the number of pay periods. Reimbursements, other income, bonuses will also be added to the gross pay.
So, the paycheck that the employee receives after all taxes and voluntary deductions are taken from the gross pay is the net pay. You can find the gross pay at the bottom of the pay stub in 123PayStubs.