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Gross Pay vs. Net Pay: How Do They Differ?

by Seth
Gross Pay vs. Net Pay

It is a very delightful moment when you get informed about your selection for a job. But if you are getting an appointment for the first time, you may face some problems. Many people don’t know the best way to get their pay and compare gross pay vs. net pay

Every employee should know which way is the best for him to take his pay. To help such employees, we did some work on gross pay vs. net pay and summarized the results below. If you want to get complete information about gross pay and net pay, then read the below article thoroughly.

Gross Pay vs. Net Pay

What is Gross Pay?

Gross pay is the pay that an employee owns, or simply it is the employee’s total salary. Like if you have a gross pay of 50,000 dollars, it means your entire salary is 50,000. But still, you have to pay the taxes and other billing charges.

When you put gross profit vs. net profit, you will observe that the gross pay is higher than the net pay every time. It is because the gross profit is your entire salary, as mentioned above. On the other hand, net salary is when all the taxes are deducted from your paycheck.

How to Calculate Gross Pay for Hourly Employees?

If you have employed some people for work, you should know how to calculate pay for hourly employees. Calculating the gross income for an hourly employee is very simple. Just multiply the employee’s hourly rate by the number of hours he has worked.

If your employee works overtime, then calculate the overtime money and add it into his total pay. If you want to give your employee a tip or a bonus, just add that money to his full salary. And remember that you should deduct other applicable taxes and bills from this money as this is his gross pay.

How to Calculate Gross Pay for Monthly Salaried Employees?

To calculate the monthly gross payment of your employee, divide his annual salary by twelve. It is divided by twelve because there are twelve months in a year. Add the money that your employee has earned by working overtime or by getting a bonus. 

Let’s suppose your employee’s yearly gross payment is 500,000 dollars. To calculate his monthly gross payment, divide this by twelve, and you will get 41,666.67 dollars. This is how you estimate the monthly gross salary of your employee. If he has worked overtime, also add that money to it.

What is My Net Pay, and How to Calculate It from Gross Pay?

Your net pay is the amount of salary that you receive after all the essential deductions. The deductions may include taxes, canteen bills, and insurance charges if you have bought one. Net pay is the total money that goes straight to your pocket after all the taxes are paid. 

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Calculating your net pay requires you to know your gross pay. If you know your gross pay, you have to inquire about all the taxes you have to pay. Subtract the taxes you have to pay from your gross salary, and you will get your net pay. This is the simplest way to calculate your net income.

Suppose your gross salary is 60,000 dollars and you want to calculate your net pay. First, add all the taxes, bills, and insurance that you have to pay. Suppose you have to pay 5,000 dollars of home tax and 3,000 dollars of health insurance. Subtract 8,000 from your gross pay, and you get 52,000 dollars.

How to Calculate Net Pay on Your Own

If you want to calculate your employee’s net pay on your own, then follow the below-given steps. This is the simplest and easiest way to calculate net income on your own, and also, it’s the correct method.

Estimate Pre-tax Deductions

The first step is to check for any voluntary deductions. Voluntary deductions are those, which your employee wants to be deducted from his salary voluntarily. This voluntary deduction benefits the employee later in his life. That’s why many employees choose this, though it is not a part of any law. 

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These are also known as pre-tax deductions because these are deducted from the salary before removing taxes. Some types of voluntary pre-tax deductions are discussed briefly:

  • Retirement Contributions: This is the money that an employee gets on his retirement from the job. Several companies offer this to support their employees financially after he leaves the job.
  • Health benefits: Some companies offer their employees free health facilities. But this facility is not free. A tiny amount is deducted from the employee’s salary each month for this purpose.
  • Commuter benefits: Some companies also offer commuter benefits to their clients. Commuter benefits mean that when you travel or go somewhere, the companies pay some share. Those employers who work far from their home go for this opportunity.
  • Cost to company: Cost to a company is a very rarely used term. It is mostly used in countries like India and Africa. It usually refers to the expenses that a company spends on its employees. 

Calculate Mandatory Payroll Taxes

Mandatory payroll taxes are those taxes that have to be paid at any cost. The employee has to pay these taxes if he receives a gross salary. If the employee’s salary is net pay type, the company deducts them and delivers them to the government.

So, in the second step, calculate the mandatory payroll taxes that your employee has to pay. These are of two types. One is FICA payroll tax, and the other is Federal income tax. Both of these are briefly explained here.

FICA Payroll Tax

Fica payroll tax is the money that goes towards the social security of the employee and his medicare. It is 15.3% of an employee’s gross pay, which is deducted after the pre-tax deductions.

FICA payroll tax is paid by both the employer and the employee. The employer pays half tax (7.65%) while the other half is to be deducted from the employee’s salary. 6.2% of the tax paid by employees goes to social security tax, and the remaining 1.45% is included in medicare tax.

How to Calculate FICA Payroll Tax

It’s very simple to calculate the FICA payroll tax that an employee has to pay. The FICA payroll tax is 7.65% of the employee’s gross salary, so first, determine his gross pay. Then calculate 7.65% of his total salary, and that is his FICA payroll tax.

Federal Income Tax

The government also charges some taxes from the employee, which depends on his salary. Federal income tax is deducted from the employee’s salary after pre-tax deductions are made. 

How to Calculate Federal Income Tax?

Calculating Federal Income tax requires some good math. To calculate the federal Income tax, you need to know about your employee’s filing status, gross wages, and withholding allowance. With these details and your payroll chart, you can then calculate the Federal Income Tax of your employee.

Mandatory Payroll Deductions

Some other mandatory payroll taxes include Wage Garnishments. Wage Garnishments are the extra taxes that some employees have to pay for several reasons. If your employee has to pay such taxes, the government will inform you of the amount of money. You have to deduct that amount from your employee’s salary and later deliver it to the government. 

Effect of Gross and Net Pay on Your Taxes

The employer has to pay half of the employee’s FICA payroll tax. Out of the total 15.3 %, the employer has to pay half tax which is about 7.65 %. At the same time, the other half is deducted from the employee.

Besides this, the employer has to pay another tax known as FUTA tax. This tax is for the removal of unemployment. Per year, the employer has to pay 6% of his employee’s salary. If your employee has paid all the government taxes on time, he may get a relaxation of 5.4%. Now you have to pay only 0.6%.

Frequently Asked Questions (FAQs)

Why is my gross pay higher than my net pay?

It is because gross pay is your full salary without any tax deductions. If you put gross salary vs. net salary, you will see that gross wage is higher than the net salary. The sole reason for this difference is that gross salary is without tax deductions.

What is deducted from gross salary?

If you are receiving your pay as gross salary, then nothing is deducted from your paycheck. You will receive your full payment, and you have to pay the taxes. 

Is net or gross before taxes?

Net pay vs gross pay comparison shows that the gross salary is always higher than the net salary. It is because the gross wage is before the taxes are paid. When the company deducts taxes from your gross paycheck, it becomes your net pay now.

How is the monthly salary calculated?

If the employee is working on an hourly basis, then multiply his hourly salary by working hours in one month. If the employee is getting paid on an annual basis, then divide his yearly salary with twelve. For the complete method, read the above article thoroughly.

What is the net take-home salary?

Net take-home salary is another name for net pay or net wage. It is the money that an employee gets after all the taxes are deducted from his paycheck.

Conclusion: Gross Pay vs. Net Pay

That was all about gross pay vs. net pay. It was a comparison between the two payment methods to help those who got their first job. General information about different kinds of taxes is given in the article. Moreover, calculating the gross pay and net pay of your employee has also been discussed in detail.

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