Employees often have questions when their take-home pay ends up being less than what was listed in their employment contract. As an HR leader, you need to be equipped to explain the reason for the discrepancy, which comes down to gross vs. net pay.
Read on for a simple but thorough explanation on the differences between gross pay vs net pay—and how to calculate each.
What is Gross Pay?
The gross pay definition is straightforward: it’s the total amount of money an employee earns before any taxes or deductions are withheld from their paycheck.
Gross pay represents an employee’s total earnings for a pay period and serves as the starting point for calculating net pay. This pre-deduction amount is what employers use to report wages to the IRS and what determines an employee’s tax bracket.
How to Calculate Gross Pay
There are two formulas for calculating gross pay, one for hourly employees and one for salaried employees. Hourly gross pay is an employee’s hourly rate multiplied by hours worked. Salary gross pay is an employee’s annual salary divided by the number of pay periods.
Use our calculators below to quickly calculate gross pay:
What is Net Pay?
Net pay is the amount an employee actually receives after all deductions have been taken from their gross pay. These deductions include federal, state, and local taxes, as well as contributions to benefits like health insurance, retirement plans, and other withholdings.
How to Calculate Net Pay
The net pay calculation is gross pay minus deductions. For example, if an employee’s gross pay is $2,000 and their total deductions amount to $500, their net pay would be: $2,000 – $500 = $1,500.
Key Differences Between Gross and Net Pay
The differences between gross and net pay include the following:
- Gross pay is used for calculating taxes and benefits, whereas net pay is the worker’s actual take-home pay.
- Gross pay is a higher amount because it is pre-deductions.
- Gross pay is fixed based on a salary and wage agreement. Net pay varies based on benefits selection and tax bracket.
Common Deductions from Gross Pay
Common deductions from gross pay include both mandatory and voluntary deductions. The mandatory deductions are:
- Federal income tax: Withheld based on W-4 information and tax brackets
- State income tax: Varies by state
- Local Income Tax: Varies by locality
- FICA taxes:
- Social Security (6.2% up to wage base limit)
- Medicare (1.45% on all earnings, plus 0.9% additional Medicare tax for high earners)
Voluntary deductions include:
- Health, dental, and vision insurance premiums
- Retirement plan contributions
- Health Savings Account (HSA) or Flexible Spending Account (FSA) contributions
- Life insurance premiums
- Disability insurance premiums
- Charitable contributions
- Union dues
Importance of Understanding Gross vs. Net Pay
Knowing the relationship between gross and net pay helps ensure accurate payroll processing and tax compliance. It also enables employers to effectively communicate total compensation packages to employees, highlighting the full value of benefits beyond just salary.
With clear gross-to-net calculations, businesses can more accurately budget for labor costs and make informed hiring decisions.
Employer Responsibilities for Gross and Net Pay
Employers have several responsibilities related to gross and net pay. They include:
- Ensuring gross pay is calculated correctly based on hours worked, overtime, and agreed-upon rates
- Withholding the correct amount of taxes from gross pay based on W-4 forms and current tax rates
- Remitting withheld taxes to appropriate government agencies on schedule
- Providing detailed paystubs that clearly show gross pay, all deductions, and net pay
- Following all federal, state, and local laws regarding minimum wage, overtime, and required deductions
- Maintaining accurate payroll records for the required retention period
How Paycor Helps
Simplify payroll management and ensure accurate withholdings with Paycor Payroll software. Backed by tax compliance expertise, the software provides in-product compliance updates to notify you of any key changes at the local, state, or federal level.
Paycor makes it easy to understand gross vs. net pay, giving both administrators and employees a clear breakdown of earnings and deductions on every paystub. With AutoRun, administrators simply schedule payroll to process on a specific day and time, and the software does the rest. Employees gain access to paystubs three days before payday to avoid errors and cut down on last-minute changes.
Ready to level up your payroll processing with Paycor? Take a guided product tour to learn more.
