Gross Pay Vs. Net Pay: What It Is And Examples

Every employee wants to be paid appropriately for their services. Part of that is familiarizing yourself with each paycheck you receive and maintaining your salary history.

The values of gross and net pay on your checks help you understand how much money you’ve received in total, what deductions you’ve paid, and the exact amount that will be accessible to you.

What Is Gross Pay?

Gross pay refers to the all-encompassing number that accounts for every hour an employee has worked. This amount does not have deductions taken out of it yet, and therefore, will be the highest number on an employee’s paycheck.

An employee’s gross pay will include all sources of income that they receive. This includes overtime they’ve worked, tips they’ve collected, and any other bonuses they’ve received in their time working. It will also change if receiving a raise or taking off unpaid time from work.

For example, when an open job listing states that you’ll be making $50,000 per year, this is the gross pay amount before taxes and deductions.

Why Do You Need to Know Your Gross Pay?

The most common reason for needing knowledge of your gross annual or monthly income is for lenders.

When you’re applying for a mortgage, apartment, or any large purchase that requires a loan, they’ll ask for your gross income, as opposed to your net pay. Credit card companies will also ask for your gross earnings information before deciding on approving you for a card.

Lenders turn to an individual’s gross annual income to measure their standard salary before getting into the complexities of deductions and taxes.

In interviews, you will also refer to your gross pay when being asked about your salary requirements.

What Is Net Pay?

Net pay only includes the amount of money that will be directly available to you. It is the sum of your wages after taxes and deductions have been removed. An employee’s net pay will be more noticeable on their paycheck since this is the total you will receive.

Let’s look at the previous example of a job opening that pays a yearly salary of $50,000. This number has not been taxed yet to reflect accurately. At an average tax rate of 18%, the employee would be paying $9,000 of their income in taxes and actually only receive $41,000 for their work.

Why Do You Need To Know Your Net Pay?

Net pay is important for creating a budget and planning your financial future. Unlike gross pay, you probably won’t need to know your net pay when applying for loans or big purchases, but it helps you decide whether you can afford these endeavors.

Since the dollar amount you’ll end up with after deductions is your net pay, it shows you how much money you’ll have at your disposal immediately after cashing your paycheck. This amount will differ between employees, even if they’re working in the same position with the same responsibilities, because their tax deductions differ.

You build a budget around your net pay instead of gross because it’s a more accurate representation of the money you’ll have available to use in your account every month.

The Difference Between Gross And Net Pay?

The big difference between the gross and net pay numbers is accounting for taxes and deductions. Net pay is the result of gross pay after deductions have been made. Usually, your net pay will be emphasized on your check because this is the amount that will be available for you to use.

What Deductions Are Made From Gross Pay?

Most professionals understand that deductions will be made from their gross pay to arrive at the amount they will have in their pocket. However, not everyone is clear on what these deductions are.

Some paycheck deductions are mandatory in the United States.

Examples of mandatory deductions include:

• Federal, State, and local taxes

• Payroll taxes

• Social security

Additionally, your employer can include voluntary deductions from your gross pay for other reasons.

Examples of voluntary deductions include:

• Compensation for equipment or uniforms

• Pension account

• 401(k)

• Automatic savings account

Certain deductions won’t be forever inaccessible to you, such as an automatic savings account that takes a percentage of your paycheck every week. These are deductions that you eventually have access to after a definitive amount of time, which often spans many years.

Examples of Factors That Impact Tax Deductions

Even though you may be receiving that same gross pay as a co-worker in the same position, the net pay you receive may differ significantly depending on your life circumstances.

Below are factors that commonly impact an individual’s tax deductions.

1. Getting married. Legally wedding the love of your life can have an impact on your tax deductions. Some married couples receive a welcome tax break once they’re legally bound, especially if they file jointly. Similarly, going through a divorce can also have implications on your tax rate.

2. Having children. While most people associate having a baby with a lot of expenses, it can give you credit come tax season. Claiming a dependent awards parents with tax benefits for raising their children.

3. Buying a house. Another massive expense that comes with the pro of tax deductions is buying a house. Alternatively, when selling a house, you’ll likely come across a hefty tax rate unless you can take advantage of stipulations like filing jointly.

4. Getting a promotion. Receiving a promotion acknowledges all the hard work you’ve put forth in your position and usually comes with a pay raise.

   While this is a cause for celebration, it also can have repercussions on your taxes. A salary increase has the potential to put you in a different tax bracket, which would leave you paying a new percentage in taxes that year.

5. Going to school. Getting a higher education is an endeavor that takes a lot of time and money. To ease the burden of paying for going to school, your taxes are impacted by making this life decision. Most students can write off or offset educational expenses through their tax deductions.

How to Calculate Gross Income for a Salary Job

Usually, in a position with a salary, the employee will be told their gross salary during onboarding. It will be the number that is disclosed as the year’s amount they make.

When you haven’t been given this number, don’t worry. To figure out your gross income for a salary position, you just need a recent pay stub and a simple math equation.

If you only work one salaried job, have no other income, and receive no bonuses, you can get your gross income by multiplying your monthly gross pay by 12. For example, if you are paid a gross monthly income of $3,000, simply multiply by 12 to arrive at the answer of $36,000.

Where this can get a little tricky is when you have multiple sources of income. These can be in the form of yearly bonuses, freelance work, or tips. You need to add this amount to your gross income salary to get an answer that’s completely reflective of your income.

In reference to the previous example, let’s say you also receive tips at your job on top of the monthly gross pay of $3,000. Your tips total $75 extra dollars per week, which is multiplied by the 52 weeks of the year to get $3,900. Therefore, your gross annual income for your job would be $39,900 when accounting for tips.

How to Calculate Gross Income for an Hourly Job

Calculating gross income for an hourly job requires a little more math than a salaried role, but it’s still basic enough that anyone can do it.

Employees who don’t work consistent hours throughout the year are advised to wait until they receive their final paycheck to see their gross income as printed on their paychecks. This removes any room for error and legwork you have to do to arrive at a number that may not be entirely correct.

Employees who work a consistent number of hours every week may have a smoother time arriving at a dependable gross income through math. To figure out your annual income, you must first do the math to find your weekly and monthly income.

First, find your gross weekly income, multiply how much you get paid per hour by how many hours you work in a week.

For example, if you work 40 hours a week, earning $13.00 per hour, your gross weekly income is $520.

Now that you have your gross weekly income, multiply this number by 4 to arrive at your rough gross monthly income.

With the previous example, this would result in a gross monthly income of $2,080.

Finally, you can use this figure to find your gross annual income by multiplying it by the 12 months of the year.

For the former example, this means that your gross annual income is $24,960.

Author

Chris Kolmar

Chris Kolmar is a co-founder of Zippia and the editor-in-chief of the Zippia career advice blog. He has hired over 50 people in his career, been hired five times, and wants to help you land your next job. His research has been featured on the New York Times, Thrillist, VOX, The Atlantic, and a host of local news. More recently, he's been quoted on USA Today, BusinessInsider, and CNBC.