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Onboarding a new employee might seem like an easy task, but it is actually not. The reason is that calculating and maintaining their paychecks consumes a lot of time. It is somewhat confusing to understand what exactly gross pay is and how it differs from net pay. Especially on payday when you hardly have time to take a break, isn’t it?
Well, nobody likes to invest more time in getting the paycheck ready for salaried employees. Do you have a similar frustration at the start of every month? Then, let’s clear your confusion. No, you don’t have to be a math genius. Simply understand the difference between gross numbers and take-home figures. For that, we are here to walk you through the difference between gross pay and net pay. But first, let us start with the gross pay definition.
What Is Gross Pay?
Gross pay is the number of money earned by an individual without any tax deductions or payroll deductions. Often known as gross wages, this total sum of an employee’s income is likely to get reduced after deductions. Organizations usually keep gross pay on a pay stub to track compensation and avoid payment-related conflicts.
Let us take an example to understand the gross salary meaning in detail.
Assume that a new employee in your organization earns $25 on an hourly basis. If they worked for 42 hours during the month, then a gross will be $1050 (multiply $25 by 42 hours). Remember, here we didn’t apply any deductions from the employee’s overall income. In case the employee has earned a bonus of $20, it will contribute to the total number. As a result, gross pay will be $1070.
Now that you know the gross pay meaning, let us know how to find gross pay.
How to Calculate Gross Pay?
Calculating the gross amount involves multiplying the hourly rate by a total number of working hours completed by the employee. This process is followed while calculating gross wages for hourly workers. If you want to calculate gross pay for salaried employees, then consider their yearly income and divide it by 12 months.
Gross Pay =Total Income+Compensation / Number of Pay Periods
Some organizations also calculate payroll on a weekly basis by dividing yearly salary into 52 weeks. In case an employee works for an extra day, they will earn overtime pay, which should be taken into account while doing calculations.
Additionally, you can calculate the annual gross amount by multiplying the employee’s monthly salary with total pay periods. Suppose an employee earns $2400 per month, multiply it with 12 months to get the annual gross figure, which is $28,800.
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What Is Net Pay?
It is an amount paid to an employee after subtracting deductions from the gross pay. In simple words, it is take-home money, which is left after deducting taxes, insurance, and other obligatory deductions. Organizations can deduct the necessary amount from an employee’s salary prior to depositing money into their bank account. You can even highlight the net pay on pay stubs so that your business partner doesn’t get mistaken for gross pay.
Net pay is better understood by using the below example.
For instance, if an employee gets paid $20 per hour and has completed 45 working hours during the pay period, then their gross pay would be $900. Now, after taking off deductions from $900, their take-home salary is $720, which is equivalent to $16 per hour. Here, $720 is referred to as a net pay.
How Do You Calculate Net Pay?
Net pay calculations are made by considering the gross amount, from which the employer takes off taxes and other deductions. Here is how to calculate net pay in a simple way:
- Firstly, make sure you have gross pay ready (follow the above section for gross pay calculations)
- Now, subtract taxes and voluntary deductions from the gross pay.
Net Pay Formula:
Net Pay = Gross Pay – Total Deductions
Let’s say your employee earns $5000 annually as a gross salary. However, $1200 is the total deduction for each pay period (i.e. 12 months). Then, the final net amount will be $3800.
So, the employer needs to issue a paycheck of $3800, which is the take-home salary of an employee.
What Is the Difference Between Gross Pay and Net Pay?
Now that you have a clear idea about gross pay and net pay, let’s delve deeper into the distinction: gross pay vs net pay.
- The amount of Gross pay will be higher than net pay because it consists of health premiums, insurance premiums, and state income taxes.
- Whereas, net pay is the in-hand salary of an employee after deductions. This amount gets credited to the employee’s bank account on the payday.
- Therefore, net pay would be some dollars less than that of gross amount.
- Gross pay is noted before mentioning net pay by an employer on a pay stub.
- All in all, the difference between gross pay and net pay lies in the elements that are likely to be deducted.
How are Hourly and Salaried Gross Pay Calculated?
When calculating the gross amount, you need to ensure it is for a salaried employee or for those who are working on an hourly basis. To simplify the calculation process, we have explained how to do it correctly with examples.
Hourly Employee Gross Pay
Calculating an hourly employee’s salary is usually made by multiplying their hourly rates with actual working hours. Here is the formula for calculating gross pay for hourly employees.
Hourly rate * Employee’s working hours = Gross pay
For example, if an employee earns $12 per hour and works for a total of 42 hours, then their gross pay would be hours $504, which is a multiplication of $12 (rate per hour) * 42 (working hours).
Also, you need to take into consideration overtime pay in case your employee has worked extra hours during the pay period. Suppose they have worked for three extra hours, earning $20 as overtime pay for each hour. Then, $60 will be added to their gross pay. As a result, gross pay will be updated to $564.
Here’s how:
(20*3) + 504 = 564
[overtime pay * extra hours + hourly pay = gross pay]
Salaried Employee Gross Pay
To calculate salaried employee gross pay, divide their yearly salary into each pay period. Such calculations can be made by considering a payroll schedule followed in your organization. The formula for calculating gross pay of salaried employees is:
Annual Salary / Pay Period = Gross Pay
When it comes to calculating the gross pay of salaried employees, you need to figure out the pay cycle in your organization. Some employers may have weekly, bi-weekly, or monthly cycles consisting of 52, 26, or 12 pay periods respectively.
Let’s say an employee makes $10,000 per year, then they will earn $833.33 for 12 pay periods. Similarly, if you follow a weekly, or bi-weekly pay cycle, then an employee gets $192.30 or $384.61 respectively.
Moreover, if the same employee receives a commission of $50 during the pay period, then the updated amount would be 883.33 as their monthly income. Just like that, weekly and bi-weekly income will also increase to $242.3 and $434.61. Hence, the gross amount may vary depending on pay periods followed by your organization.
Typical Deductions From Gross Pay
There are multiple elements to be deducted from the gross pay at the time of calculating the net amount. Here we have compiled a list of them:
State income taxes: it is the specific amount that you must pay to the state government from individual income. Such taxes may vary according to your state.
FICA taxes: A Federal Insurance Contributions Act (FICA) tax is an automatic money deduction from an employee’s paycheck. FICA taxes are usually for social security purposes.
Garnishments: Wage garnishments are deductions made considering court orders to legally withhold some money from income. It is a legal process of deducting money from an individual’s paycheck.
Insurance premiums: It is a cost of medical insurance that some employees wish to avail at the time of joining your organization. It provides financial help in case of a medical emergency.
Retirement savings: A money savings that employees prefer to avail in order to fulfill their post-retirement goals. They usually make contributions to the retirement plan of 401(k)s.
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Conclusion
In a nutshell, gross pay is the total amount of money including mandatory taxes, insurance, and other benefits. It is not the same amount that goes into an employee’s paycheck. If you are someone who often finds it difficult to calculate gross pay and net pay, follow the aforementioned steps. These calculations will help you find the accurate gross and net income of employees easily.
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