Gross pay and net pay are two important terms to understand. Which pay is most important to me, and how do I calculate it? With the PaycheckCity net pay calculators, gross pay calculators, and other resources, calculating paychecks is simpler than ever.
Team PaycheckCityMar 13, 2020
The terms "gross" and "net" can be confusing and differ depending on whether business wages or employee wages are being discussed. In this article, we will be looking at the difference between employee gross pay and employee net pay. So, what's the difference between these two words, and how do you get from one to the other?
The total amount earned by an employee is known as the gross pay. When "gross" is referring to a person's income, it can also be called gross wages. Gross pay is the total amount of money an employee earns before taxes and deductions. It is the amount generally referred to in conversations as it is easier to remember and calculate. For example, when an employer sends an offer letter to a new hire, the salary listed will be the gross pay, which many times ends in zeros, since the employer does not have the employee withholding amounts yet.
After taxes and other deductions, an employee can finally cash their check. The amount an employee takes home after taxes and deductions are taken out is referred to as net pay. Net pay can also be referred to as an employee's "take-home pay" since this is the amount they receive on payday. Net pay is smaller than gross pay since tax and deductions have been subtracted from the gross pay to get net pay.
Similarly to the information you may learn in an accounting class, gross minus expenses equals net. A store typically calculates its net profit by starting with the revenue and subtracting its costs, which equates to the gross profit. Then, expenses are deducted from the gross profit to reveal the net profit.
Calculating Gross Pay
Gross pay is simpler to calculate than net pay. To calculate gross pay for an hourly employee, an employer will need to know the employee's hourly rate and how many hours they worked during the pay period. This information can easily be entered into PaycheckCity’s hourly calculator, and the hourly calculator will calculate the gross pay based on the hourly rate and number of hours worked. Other hourly pay types can include commission, tips, and overtime. For additional hourly pay types, an employer would need to click "Add Rate" under "Rates Information." For instance, if an employee is paid $10 per hour and works 40 hours during the pay period, their gross pay is calculated by multiplying their pay rate of $10 per hour by their hours worked, which is 40 for a gross pay of $400. Now let’s assume this employee worked 5 hours of overtime during the pay period and they are paid time and a half for overtime. To calculate the gross pay based on the overtime rate and hours, 5 hours is multiplied by the $15 overtime rate totaling $75 gross pay for the overtime hours worked. The total gross pay for the period would be the $400 plus $75 totaling $475.
To calculate a salaried employee's gross pay, the employee’s annual salary is divided by the number of pay periods in a year. The number of pay periods in a year is determined by the pay frequency. If a salaried employee's pay frequency is semi-monthly, then there are 24 pay periods in the year. Typically, for an employee paid bi-weekly, there are 26 pay periods. However, during leap years, like 2020, there are 27 pay periods. A weekly pay frequency can be affected by the leap year, and in some situations, the customary 52 pay periods per year increase to 53.
To calculate the gross pay for a salaried employee with an annual salary of $52,000 paid weekly, the $52,000 annual salary is divided by 52 pay periods resulting in a $1,000 gross pay for the pay period. Now suppose this employee is paid on a semi-monthly basis. The annual salary of $52,000 is divided by 24 pay periods totaling $2,167 per pay period.
Calculating Net Pay
Calculating net pay is not a straightforward calculation like gross pay is. To calculate an employee’s net pay, pre-tax deductions, payroll taxes, and post-tax deductions are subtracted from the gross pay. The type of deductions and payroll tax rates often vary from employee to employee based on their individual W-4 elections and where they live, making the calculation complex.
To calculate the net pay of the hourly employee referenced above, we will use the PaycheckCity hourly paycheck calculator.
Based on the pay and personal information entered in the hourly calculator, we see that the net pay is $281.40 from the gross pay amount of $475.00.
Gross Pay and Net Pay and Paychecks
A paycheck should always include the gross pay amount and the net pay amount. This information helps an employee understand how much they earned and how much they received. But, how can an employer explain to them where the rest of their earnings went?
The first deduction listed under paycheck results is federal withholding. Federal withholding is based on the information an employee submits on their Form W-4. Information such as federal filing status, the number of allowances, and additional federal withholding determine how much money is deducted from each paycheck. However, the new Form W-4 determines this amount based on different information. The 2020 Form W-4 requires information such as federal filing status, dependents amount, other income, deductions, and additional federal withholding. With our dual scenario calculator, you can compare income based on the 2019 Form W-4 versus the 2020 Form W-4, or you can run other scenarios to see how different federal withholding choices affect the take-home pay.
The next deductions are social security and Medicare. Together these two make up the FICA tax, the Federal Insurance Contributions Act tax. Both the employer and the employee pay these taxes. Social Security is paid at a rate of 6.2 percent, which equates to 12.4 percent in total when you combine the employer and employee contributions. Medicare is paid at a rate of 1.45 percent from the employee and employer, which totals 2.9 percent.
The last deduction usually listed on a paycheck is the state tax. While some states don't have state income tax rates, others can get as high as 13 percent. Florida, Texas, and Washington are among the few that do not have state income tax rates. California, Hawaii, and New Jersey are among the highest at over 10 percent.
Other taxes that can commonly be listed as a deduction are local taxes, school district taxes, and more. By using your address when calculating your paycheck, you can determine if there are additional taxes for your area that will be deducted from your paycheck.
Gross Pay and Net Pay Overview
While gross pay is important to a manager, net pay is essential to an employee as this is the take-home pay. The PaycheckCity net pay calculator can help anyone determine what their take-home pay will be based on their salary or hourly rate and hours worked. To calculate gross wages based on your most recent paycheck, you can use the PaycheckCity gross-up calculator. This calculator will ask you for the same information as the salary calculator, including deductions, filing status, and additional withholding; however, by using the net pay on your paycheck, you can determine the gross pay.
Use PaycheckCity.com to access free calculators, forms, and payroll insights for all of your paycheck needs.
These free resources should not be taken as tax or legal advice. Content provided is intended as general information. Tax regulations and laws change and the impact of laws can vary. Consult a tax advisor, CPA or lawyer for guidance on your specific situation.