As a business employer with several employees, it is time to understand the difference between gross pay and net pay. It is time to understand the numbers that go into an employee’s paystub. If you are an employee, this is also for you. Without proper planning, it can affect your financials and budget planning.
To make it easier, you can generate pay stubs using the Real Check Stubs paystub maker. In this article, we’ll explore everything you need to know about gross pay and net pay.
What is Gross Pay?
Gross pay is the wages an employee makes before any payroll deductions are taken from the salary—deductions like health insurance, taxes or student loan payment. For example, when you started your job, your salary was negotiated to $50,000; that is your gross pay. It is also your base salary and always larger than your net pay.
What is Net pay?
Net pay is the salary left once taxes and deductions have been taken out of your gross pay. This is your take home income that is deposited into your bank account.
What are the deductions made on your Gross pay?
Every deduction made on the gross pay impacts the net pay.
- Federal income tax: It is calculated using a bracket system that increases progressively based on income.
- State income tax: Many states use progressive tax brackets, while some states have no income tax.
- Social security and Medicare taxes: The tax rate is 6.25% and 1.45%, respectively
- Wages garnishment like credit card debt, student loan debt, child support, alimony and medical bills.
- Health insurance premiums
- Retirement savings
- Form W-4 employee’s withholding certificate impacts how much federal income tax is deducted each pay day. It provides information about your filing status, dependent and other sources of income.
As an employer, you should generate a paystub for your employees to easily calculate and be aware of any deductions.
How to calculate gross pay?
- For Salary workers: Depending on what payment schedule your employers operate. You should divide your yearly salary by the number of pay period. If you are paid a month, that’s 12 paid period, twice monthly is 24 pay period, weekly is 52 pay period and Bi-weekly will be 26 pay period.
For example, if your salary is $65000 and paid bi-weekly. Then your gross pay per period is $2500 ($65,000 divided into 26 pay periods)
- For hourly workers: Calculate by multiplying the hourly wage by the number of hours worked within a pay period. For example, if your pay is $25 per hour and they worked 40 hours in a pay period, their gross pay should be $1,000
How to calculate Net pay?
It is calculated by subtracting required taxes or deductions from the gross pay amount. To get the yearly net pay, multiply the result by the pay period.
What is the difference?
The gross pay is always larger than the net pay. All information deducted from the gross pay is always in the pay stub, so double-check before beginning any calculations.
An employee’s paystub should always show precisely how much they have earned in a pay period (gross pay) and a line-by-line detailing their deductions and the final amount of their paycheck (net pay).
Generate a paystub for your employees using the Real Check Stubs paystub maker.