Figuring out payroll can become a quite tiring process. If you don’t know your way around financial terms, it can get very difficult to handle your money. For people who have been salaried for a long time, terms like ‘gross pay’ and ‘net pay’ must be familiar. But for someone who’s recently started working, these terms might feel alien.
In this article, we will be talking about gross pay, net pay, and the difference between them. Keep reading to find out more.
What are Gross Pay and Net Pay?
Gross pay is the salary of an employee without any tax deductions and other withholdings.
Net pay is lesser than gross pay. It is the total income that an employee gets after deductions for income tax, insurance, provident funds, etc have been made from their paycheck. This is the total pay that they get in hand.
Gross income includes differentials like bonuses, holiday pay, and overtime pay. If there is no income tax deduction, gross pay and net pay are generally the same. This happens when the individual’s income does not come under income tax slabs.
How do Gross Pay and Net Pay differ from each other?
Here’s how we can distinguish between gross and net pay.
#1 Based on their components
When it comes to gross pay, the components include housing rent allowance, medical allowance, conveyance allowance, etc. The components of net income include income tax, provident fund, pension, professional tax, etc.
#2 Based on their amount
Gross pay is the maximum amount of the salary that an employee receives in return for their services. Because net pay is the amount that an employee receives after all the deductions have been made, it is a lesser amount than gross pay.
#3 Based on their calculation formulae
The formula to calculate gross pay is thus:
Gross monthly pay = annual gross salary/ number of payroll periods.
For example, if the annual gross pay of an employee is $50,0000, then the gross monthly pay would be 50000/12, which amounts to $4,166.
The formula to calculate net pay is thus:
Net monthly pay = Gross pay – all types of deductions
To calculate this, you must have a thorough idea of the various tax rates and other deductions involved.
#4 Based on their benefits
When considering gross income, employees get holiday pay and other incentives. As far as net pay is concerned, individuals need not pay taxes at different levels. This is because a substantial amount is already deducted before handing out the salary to the employee.
Financial knowledge is essential to understand your payroll well. It might seem difficult at first to grasp all the complex terms at first, but it’s best to give yourself some time and figure out the basic financial ideas. We hope you’re now familiar with the difference between gross pay and net pay.