Differences between Gross Pay vs. Net Pay
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Key points about: gross vs. net pay
Gross pay represents the total amount you earn from working within a pay period.
Net pay represents the actual amount of money you receive through your paycheck after deductions.
Deductions may include taxes, insurance premiums, retirement contributions, and more.
When you look at your pay stub, you may notice two different amounts. Your gross pay, the larger number, represents the total amount you’ve earned throughout a given pay period. Your net pay, on the other hand, shows how much money you’ll take home after taxes and other deductions. The two figures are both essential parts of personal finance, but they play different roles. Understanding how both types of income work could help you with tasks like developing a budget, filing taxes, and applying for credit cards.
If you’re not sure whether you’ll qualify for a credit card based on your gross and net pay, you can see if you’re pre-approved with no harm to your credit score.* This can help narrow down your choices so you can find the best fit for your financial situation.
What is gross pay, or gross income?
Gross pay (or gross income) refers to the total amount of money that a worker earns from their job during a given period. It includes wages, bonuses, and commissions. On your pay stub, gross income shows the total amount you’ve made at work before payroll deductions. The sum of money you actually receive is almost always lower than your gross pay.
How do you calculate gross pay?
The formula for calculating gross pay depends on your pay schedule. If you receive a salary, you can divide your annual salary by the number of paychecks you receive in a year. The solution should be your gross pay (per pay period).
If you have a $60,000 salary and receive your paycheck biweekly, your gross pay is about $2,307.69.
$60,000 / 26 = $2,307.69
For hourly workers, the calculation is a little different. Just multiply your hourly wage by the number of working hours in a pay period. The final amount should also include any additional holiday or overtime pay.
If you made $25 an hour and worked 80 hours in a given two-week pay period, your gross pay would be $2,000. If you worked an additional 10 overtime hours each week at a time-and-a-half (1.5) overtime rate, your gross pay would be $2,750.
$25 x 80 = $2,000
$25 x 1.5 = $37.50
$37.50 x 10(2) = $750
$750 + $2,000 = $2,750
What is net pay, or net income?
Your net pay is the amount of money you take home from each paycheck after deductions. Employers and the government withhold certain sums from your gross pay to cover benefits and taxes. Even if you’re self-employed, you still have to cover certain taxes yourself and may have to pay for insurance.
Deductions that may affect net pay
A wide range of deductions can affect your net pay. Tax-related deductions are often mandatory. However, you may also opt into additional deductions to access benefits at your workplace. Voluntary deductions are often pre-tax. That means you don’t owe taxes on that portion of your income, even though you reap benefits like insurance.
Mandatory deductions may include:
- Federal income tax – The federal government deducts income taxes to pay for public benefits. The amount you pay depends on your income level.
- State income tax – State income taxes usually go to state-specific public benefits. Each state may tax differently.
- Local income tax – Local income taxes usually go to local public benefits in your city or town. Localities may tax differently.
- Federal Insurance Contributions Act (FICA) tax – The FICA tax includes both a 6.2% Social Security tax and a 1.45% Medicare tax. Employers match these contributions. According to the Social Security Administration, these contributions support people who currently benefit from Social Security and Medicare programs.
- Additional regional taxes, when applicable – Depending on where you live, you may owe additional taxes.
- Wage garnishment – If you owe certain types of debt, your employer may have to deduct a portion of your check to cover it. Garnishments don’t reduce your tax obligation.
Voluntary deductions may include:
- Insurance – If you choose to enroll in health, dental, vision, short-term disability, or life insurance through your job, premiums often come out of your pre-tax paycheck.
- Retirement contributions – Your workplace may offer a retirement savings plan, like a 401(k). If you enroll in this type of plan, you may choose what percentage of your earnings to contribute to the plan. Employers often match your contribution.
- Additional benefits – Perks like Health Savings Accounts, Flexible Spending Accounts, identity theft protection, and commuter benefits may come from your paycheck.
- Union dues – A percentage of your gross pay may go toward union dues if you’re a union member. Dues help cover the union’s operations and worker protections.
How do you calculate net pay?
Your net pay is equal to your gross pay minus any deductions. To calculate net pay, start with your gross pay, then subtract any voluntary, pre-tax deductions. Apply local, state, and federal tax rates to the remaining amount. Then, subtract your taxes from the total. The remaining amount is your net pay.
For example, if your gross pay is $2,307 and you have $600 in withholdings (which includes taxes, benefits, and other deductions), you’re left with $1,707 in net income. Many variables can influence your net pay, from local taxes to your family’s health insurance needs. Your pay stub typically provides an itemized breakdown of payroll deductions.
Gross pay and net pay each play a unique role in your personal finances. Your net pay determines the actual amount of money that ends up in your bank account each pay period. Therefore, it may inform your daily financial decisions and act as the basis for your budgeting and personal financial planning. If you’re planning to buy a home or rent an apartment, this type of pay can determine how much you can afford to pay each month.
Gross income wouldn’t work for budgeting because it doesn’t accurately represent your day-to-day finances. However, your gross wage is the most important amount for your taxes. The Internal Revenue Service uses a variation of your gross income called your “adjusted gross income” to determine the taxes you owe. You might also use gross income to help you choose a retirement plan. Some lenders may also consider your gross income to determine your loan or credit card eligibility.
Did you know?
When you apply for a new credit card, your income is one factor a credit card issuer will assess as part of your application, particularly your debt-to-income (DTI) ratio. Your DTI is your total monthly debt divided by your gross income for the month. A lower DTI may improve your chances of being approved.
Your gross pay represents the total amount of money you’ve earned from your job before taxes, benefits, and other deductions. Your net pay is the money that ends up in your wallet at the end of a pay period. By understanding both figures, you can make informed decisions about new jobs, benefits, budgeting, credit cards, and more.
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