The difference between gross pay and net pay is the amount deducted from a person's wages for benefits, taxes and other expenses. Net pay is the amount that people earn after those deductions.
When an individual receives his or her initial paycheck from a job, that is the gross amount of pay. Gross pay is the individual's total earnings before the other deductions, which may include deductions at the federal level as well as state level. Gross pay includes the individual's base salary or hourly earnings and any bonuses or commissions that he or she received during that pay time period. Gross pay also includes any overtime work that a person puts in and any reimbursements given from an employer. Paid time off for vacations and illness will also be reflected in a person's gross pay.
Although many people equate salary with gross pay, the two terms are distinct. Salary refers to the agreed-upon earnings that an employer will give a worker in a given period of time. Salary is only calculated as the standard base pay rate or hourly earnings, and it does not include any extra money that an employee earns through commissions, bonuses and tips. Therefore, an employee's gross pay usually exceeds his or her salary rate.
Net pay, in contrast, is the difference between gross pay and an individual's actual earnings during a pay period. Another term for net pay is "take-home pay." Net payment is the amount that an individual receives after income taxes, insurance, social security benefits, pension contributions, retirement contributions, charitable donations and any other expenses have been deducted. Deductions from a person's gross pay can include local, state and federal taxes. Individuals are also responsible for paying Federal Insurance Contributions Act (FICA) deductions, which include payments for social security and Medicare. While gross pay is an important figure to know, net pay is the value that individuals are most concerned with. If a person makes $50,000 annually according to gross pay, for example, his or her actual annual payment might be closer to $48,000 after all deductions have been accounted for. Because net value reflects a person's take-home pay in a given amount of time, it influences his or her financial plans and expenses.
Another consideration to keep in mind is that two individuals with the same annual gross pay each year, such as $50,000, may have different amounts of take-home pay. This is primarily due to differences in the information that people report on tax claims. One person who earns $50,000 each year, for instance, might be married and have children. In contrast to the other person who earns $50,000 and claims no dependents on a tax return, the taxpayer with the family has a higher take-home rate of pay for the year, even though he or she pays more for benefits. This is due, in part, to the fact that there are tax exemptions for children. Since states and municipalities can make deductions for taxes, people round the country who earn the same gross pay may have different net pay rates based on the differences in the taxes within their local regions. Although some expenses are not reimbursed, people may get a refund on their taxes at the end of the year if they have been identified as paying too much over the course of the year.