Payroll 101: Gross Pay vs Net Pay
No matter the business size, knowing the difference between gross pay net pay is crucial. It’s one of the first steps when it comes to the frightful and confusing task of handling a business’s budget, calculating taxes, and expertly processing payroll. If payroll isn’t your expertise, differentiating gross and net pay can be confusing. Employees might have different payment amounts and require various deductions. It’s time to understand what gross and net pay are and the numbers that go into an employee’s paycheck so you will become an expert at payroll and have a thriving business.
What is Gross Pay?
Gross Pay is the amount of money the employee earns before the payroll deductions are taken out such as taxes, benefits, and wage attachments. Gross pay is noted on the employee’s pay stub and should reflect an employee’s salary or hourly wage, plus reimbursements, bonuses, overtime pay, or commissions.
How to Calculate Gross Pay:
Salary Employees: Their gross pay is their annual salary divided by how many pay periods they have in a year. So if an employee is getting paid $48,000 annually and gets paid once every month, you divide their annual salary of $48,000 by 12 pay periods. This means they would be getting paid $4,000 a month. If they are getting paid weekly you would divide their annual salary of $48,000 by 52 pay periods. Which means they would be getting paid $923.08 a week.
Paid Per Mile Employees: If a truck driver employee is getting paid .50 cents per mile and drives 1,000 miles a week then they would be getting paid $500 weekly.
Hourly Employees: Their gross pay can fluctuate depending on how many hours the employee works each pay period. To calculate their pay, multiply their hourly rate by the amount of hours they worked in a pay period. If a worker earns $14 per hour for 40 hours per week and gets paid weekly, their weekly gross pay would be $560 ($14 x 40 hours). This is if they don’t miss a day though and don’t work overtime.
What is Net Pay?
Net Pay is the amount of pay that is left after you take out taxes and other deductions from an employee’s gross pay. The employee’s take-home rate will vary on how much is deducted from their paycheck. Some deductions are voluntary, while others are mandatory. Some deductions may include things such as Federal taxes, State taxes, Social Security and Medicare taxes, health insurance premiums, retirement account contributions, wage attachments (garnishments), and other voluntary or obligatory deductions.
How to Calculate Net Pay:
The calculations can vary for each employee since each employee has their own deduction types and amounts. Calculating net pay is the same for both salary and hourly paid employees. The net pay formula is simple. After calculating the gross pay, you just subtract the deductions and taxes each employee has to get their final net pay (take-home pay).
The Difference Between Gross Pay and Net Pay:
Gross pay is 100% of the employees wages. Including commissions, bonuses, reimbursements. The Gross pay is how much the employee gets before taxes and deductions get taken out.
Net pay is the gross pay after all of the deductions from taxes, benefits, and garnishments have been taken out. After everything is paid, this is the amount that the employees actually get to take home.
Tessa joined Superior Trucking Payroll Services in September of 2022 after graduating with a Bachelor’s degree in multimedia journalism from Grand Valley State University. She has a passion for writing and binge-watching TV series.
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