July 22, 2020 Payroll en_US Learn more about the difference between gross pay and net pay, and see how to calculate both an hourly and salaried employee's pay. https://quickbooks.intuit.com/cas/dam/IMAGE/A97BP5U8j/How-to-define-and-calculate-gross-pay-versus-net-pay_featured.jpg https://quickbooks.intuit.com/r/payroll/gross-pay-vs-net-pay/ Gross Pay vs Net Pay: How to Calculate the Difference
Payroll

Gross Pay vs Net Pay: How to Calculate the Difference

By Danielle Higley July 22, 2020

Gross pay, also called gross wages, is the amount an employee would receive before payroll taxes and other deductions. By contrast, net pay is the amount left over after deductions have been taken from an employee’s gross pay. Net pay is sometimes called take-home pay. Depending on the size of the payroll deductions, an employee’s net pay may be significantly lower than their gross pay.

Use the links below to jump to the section that best covers your query, or read end to end for an in-depth overview on the topic.

What is gross pay?

Gross pay is the total pay a worker earns before applicable payroll taxes and deductions are taken out. It’s their cumulative earnings amount, meaning it includes any overtime pay, bonuses, and payroll advances the worker has earned that pay period.

What is net pay?

Net pay is a worker’s total take-home pay, or what’s left after payroll taxes and deductions are taken out. Some common deductions include FICA payroll taxes, income tax withholdings, health insurance, and retirement contributions. Some deductions are mandatory, while others are at the request of the employee. Usually, net pay is the final total on an employee’s pay stub.

How to calculate gross pay for hourly employees

You calculate gross wages differently for salaried and hourly employees. To calculate an hourly employee’s gross wages for a pay period, multiply their hourly pay rate by their number of hours worked. Then add any additional income they’ve earned that pay period, including overtime pay, commissions, bonuses, etc. Here’s how that gross pay formula would look, using a one-week pay period.

Step 1: Multiply the hourly rate by the number of hours worked, up to 40 hours per week. Let’s say the employee makes $15 per hour. If the employee works 40 hours, they’ve earned $600.

Step 2: Add overtime, tips, commissions, etc. Remember that, typically, overtime is 1.5 times the employee’s hourly rate. In this case, the employee worked two overtime hours and earned a $50 commission. The employee’s overtime pay rate is $22.50, so they earned $45 plus their commission. Table 1 illustrates the formula.

Table 1
Hourly rate Regular hours worked Overtime hours Other income Gross Pay
$15 40 $600
$15 x 1.5 2 $45
$50 $50
Total: $695

How to calculate gross pay for salaried employees

To calculate a salaried employee’s gross pay for a single pay period, divide their annual salary by the number of pay periods in the year. Then add any additional income the employee has earned that pay period, just as you did with the hourly employees.

For example, say a salaried employee makes $60,000 a year, and the company has one-week pay periods. Divide $60,000 by 52 weeks for a total of $1,153.85 per pay period. If the employee had also earned a $50 commission on top of that, their gross pay for the week would be $1,203,85. Here’s how an employee’s gross pay would be impacted, based on the number of pay periods in the year.

Step 1: Determine the number of pay periods in a year. If employees are paid every two weeks, there are 26 pay periods. If employees are paid semi-monthly, there are 24 pay periods. And if employees are paid once a month, there are 12 pay periods.

Table 2
Pay schedule Pay periods per year
Weekly 52
Every two weeks 26
Semi-monthly 24
Monthly 12

Step 2: Divide the employee’s annual salary by the number of pay periods. Here’s how a salaried employee’s gross pay would look, divided by each type of pay period. The employee’s yearly salary is $60,000.

Weekly: $60,000 / 52 = $1,153.85 per pay period

Every two weeks: $60,000 / 26 = $2,307.69 per pay period

Semi-monthly: $60,000 / 24 = $2,500 per pay period

Monthly: $60,000 / 12 = $5,000 per pay period

Step 3: Add in any additional earnings for the pay period, including commissions, bonuses, or even overtime pay if the salaried employee is nonexempt. Table 3 illustrates the formula for 52 pay periods.

Table 3
Yearly salary Pay periods Other income Gross pay
$60,000 52 $1,153.85
$50 $50
Total: $1,203,85

How to calculate net pay

The net pay formula subtracts an employee’s gross pay from their paycheck deductions. The formula follows:

Gross pay – deductions = net pay

In the steps that follow, we’ve broken out deductions into three parts: pre-tax deductions, taxes, and additional deductions. With so many deductions to consider, don’t be surprised if two employees with the same gross wages have different net pay. Employees receive different net pay when they request additional withholdings for things like retirement or health insurance savings. Employees may also have wages garnished or live in another state and pay additional taxes because of it. For instance, California employees have additional state withholdings for State Disability Insurance (SDI) and Personal Income Tax (PIT).

Step 1: Start with the employee’s gross pay. In this case, we’ll use the hourly employee from Table 1, whose gross pay for the week was $695. If this employee had zero deductions, their gross pay and net pay would be the same.

Step 2: This is where the deductions begin. Start by subtracting any pre-tax deductions offered by the business, such as health insurance premiums or retirement contributions. Let’s say an employee asks you to deduct 6% of their gross pay each week to put toward their 401(k). They also pay $62 per month for health insurance. This week, the total comes out to $59. Table 4 illustrates the formula.

Table 4
Gross pay Pre-tax deductions Net pay
$695 $695
$41.70 (401(k))
$62 (health insurance)
Total: $591.30

Step 3: Subtract all state and federal payroll taxes. This includes federal and state income taxes, FICA payroll taxes (which include Social Security and Medicare), and any additional state payroll taxes. Table 5 illustrates the formula.

Table 5
Gross pay Pre-tax deductions Taxes Net pay
$695 $695
$41.70 (401(k))
$62 (health insurance)
$83 (federal)
$39 (state)
$52.82 (FICA)
Total: $416.48

Step 4: Finally, check for any remaining deductions, such as uniform cleaning fees or wage garnishments for unpaid child support or taxes. Table 6 illustrates the formula.

Table 6
Gross pay Pre-tax deductions Taxes Additional deductions Net pay
$695 $695
$41.70 (401(k))
$62 (health insurance)
$83 (federal)
$39 (state)
$52.82 (FICA)
$10 (uniform cleaning fees)
Total: $406.48

Gross pay and net pay aren’t the same

Gross pay and net pay sound interchangeable, but as you can see from these examples, they’re anything but. The difference between a person’s initial gross pay and their take-home pay could be vast, depending on their deductions and withholdings.

Taken step-by-step, this looks like a manual process. But if you have payroll service, most of these calculations are done automatically. QuickBooks Online Payroll even takes care of state and federal taxes, so your business is always compliant.

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Danielle Higley is a copywriter for TSheets by QuickBooks, a time tracking and scheduling solution. She’s been a contributor to MSN.com, FiveThirtyEight, and a variety of HR and business blogs where she can put her affinity for long-form storytelling to best use. Read more