Summary Definition: The remaining amount of pay an employee receives after taxes and deductions.
Net pay is the total amount of money an employee gets after taxes and withholdings are taken out of her or his gross pay. These deductions can include, but aren’t limited to:
The rates for some deductions, like local taxes or benefits premiums, can vary from one job to another. So, while two employees at different organizations may earn the same gross pay, they may ultimately receive different amounts of net pay.
The simplest way to calculate an employee’s net pay is to subtract all mandatory and voluntary deductions from her or his gross pay.
For example, if Employee A earned a gross pay of $3,000 in the past month, but had $1,400 in taxes, contributions, and withholdings for that same period, she or he would receive a net pay of $1,600 for that month.
[Gross Pay] – [Voluntary Deductions] – [Mandatory Deductions] = [Net Pay]
Net pay can fluctuate from one pay period to the next due to several factors, such as changes to gross pay, tax rates, etc. However, the core logic highlighted above remains the same.
Understanding the difference between net pay and gross pay is crucial to creating or maintaining a personal budget. If an employee earns a high gross amount each month but lives in an area with high tax rates and health insurance premiums, she or he won’t ultimately receive as much as expected.
Similarly, if someone earns less gross income, but has fewer deductions, she or he may actually receive more money than in a higher cost area.
|Net Pay||Gross Pay|
|Remaining wages after taxes and payroll deductions||Wages before taxes and payroll deductions|
|Calculated by subtracting the total amount of deductions from the total gross pay||Calculated by totaling wages, salary, bonuses, commissions, etc.|
|Varies based on the rates of those taxes and deductions||Agreed upon by an employee and employer when discussing a job offer or reviewing job performance|
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