Gross Pay vs Net Pay

Making sure you understand the difference between Gross Pay vs Net Pay is critical to knowing your final salary and allowing you to balance your expenses properly.

Your wages are not supposed to be confusing. But in order to work how much your take-home wage is, versus how much the company pays you, you need to understand the impact of deductions and adjustments on your income.

What is The Difference Between Gross Pay and Net Pay?

All American workers, whether they are on an hourly contract or paid an annual salary, will have both a Gross Pay and a Net Pay displayed on their payslip. Calculating the difference is a simple step, but it is critical in working out how much money you will have to spend at the end of each pay cycle.

The simple answer is that Gross Pay is the total amount of money the company pays towards your services. Whereas Net Pay is the amount of money you get to take home after any adjustments have been made and taxes have been deducted.

Your Payslip should make these deductions for you, but it is still important to understand the changes that are being made.

Working out your Gross Pay

This should be the simplest part to work out, but it will vary based on your contract type and how many roles you have. For single salary, annual workers, it is a simple calculation. However, for people with multiple jobs, or anyone freelancing within different careers, it is slightly more complicated.

In general terms, this will be the total amount of income made before any taxes or deductions.

Read more: PwC Mission and Vision Statement Analysis

Annual Salary Workers

If you are on a single annual salary, your Gross Pay will be simple and fixed.

For example…

Lily earns $40,000 per year as an IT manager. She has no other jobs

Lily’s Gross Annual Pay is $40,000.

Hourly Workers

Hourly workers with a single job have to do a little more work to estimate their annual salary, but it is still a relatively simple calculation. First, they need to work out how much they earn each week, and then they can multiply it by 52 (the number of weeks in a year).

For example…

Alan earns $10.50 per hour and usually works 22 hours a week.

(Hourly rate) 10.50 x (Number of hours) 22 = 231

Alan’s weekly Gross Pay is $231

There are 52 weeks in a year, so we will multiply his weekly Gross Pay by 52.

(Weekly pay) 231 x (Number of weeks in a year) 52 = 12,012

Alan’s Gross Annual Pay is $12,012

Working Out Your Gross Pay with Multiple Jobs/incomes

Taxes and deductions are applied to your TOTAL Gross Pay. Therefore if you work multiple jobs or have secondary income streams (for example, selling things online, rental income, capital gains, or services you provide for a fee), it’s important to work out your total Gross Pay before adjusting it to your Net Income.

To help, I have given two examples below.

Example 1

Linda is a freelance Tech Consultant. She works mainly with three different employers; each employer has a different pay scale.

Employer A: On average, 10 hours a week at $20 an hour.

Employer B: On average, 15 hours a week at $35 an hour.

and Employer C: Set wage of $1,000 a month.

To work out her Gross Pay, she must work out the Gross ANNUAL Pay for each position separately and then add them together before dividing by 12 for her Gross Monthly Income.

Employer A

(Hours per week) 10 x (Hourly rate) $20 = (Weekly Gross Pay) $200

(Weekly Gross Pay) $200 x (Number of weeks in the year) 52 = (Annual Pay) $10,400

Employer B

(Hours per week) 15 x (Hourly rate) $35 = (Weekly Gross Pay) $525

(Weekly Gross Pay) $525 x (Number of weeks in the year) 52 = (Annual Pay) $27,300

Employer C

(Set monthly rate) $1,000 x (Number of months in a year) 12 = (Annual Pay) $12,000

Gross Annual Pay:

(A) $10,400 + (B) $27,300 + (C) $12,000 = (Total) $49,700

Example 2

Joss works full-time at a marketing agency for $50,000 a year. However, he also owns a house which he rents out for $20,000 a year.

Gross Annual Income:

(Earned Income) $50,000 + (Rental Income) $20,000 = (Gross Annual Income) $70,000

Working Out Your Net Pay

Once you have worked out your Gross Pay, you can then work out your Net Pay (i.e., How much money you actually get to take home.) Your Gross Pay will always be a larger number than your Net Pay because you have not yet applied taxes.

Before deducting your taxes, you must first apply any deductions and adjustments. Your income tax bracket is based on your AGI (adjusted gross income = your earned income minus any deduction of adjustments made). Therefore registering your deductions promptly is critical as it will affect how much money is absorbed by taxes and may affect which tax bracket you fall under.

What Are My Deductions and Adjustments?

Applying deduction and adjustments gives you your AGI (adjusted gross income); this is the number that determines how much you get taxed, so it’s important to get it right. Things you can subtract from your Gross Pay to get your AGI fall into two main categories.

Adjustments

These are usually personal exempt expenses including (but not limited to):

These adjustments (expenses) affect your income at a dollar-for-dollar rate.

Deductions

Deductions are payments that benefit ‘social good’ including (but not limited to):

Your deductions are not dollar-for-dollar, but they do affect your Taxable Income, so are very important to keep an eye on.

It is important to note that you only need to register deductions if they fall ABOVE the standard deductions for your filing status. You can find both your tax rate and standard deductions by visiting the Federal Income Tax Brackets website.

Working out Net Pay (Example)

Milo is a single-filler; he works an hourly position at $15 an hour and averages 40 hours each week.

His only pre-tax adjustment is his Health Insurance Premium of $50 a week.

Milo lives in Phoenix, Arizona. So FICA, federal, state, and local income taxes will be applied as such.

Gross Weekly Pay

(Hourly Rate) $15 x (Number of hours) 40 = (Gross Weekly Pay) $600

Pre-tax deductions:

(Gross Weekly Pay) $600 – (Health Insurance Premium) $50 = $550

Tax deductions

FICA tax 7.65%

= $550 x 0.0765

= $42.08

Federal tax Dependant on the Income Tax Tables, for $550 in Phoenix, this is $54.

=$54

State Income Tax Arizona allow a choice of State Income Taxes; for this example, Milo chose to withhold 2.7%.

= $550 x 0.027

= $14.85

Local Income Tax Phonix has no local income taxes to apply.

Working out Net Pay

Gross Pay = $600

Net Pay = $439.07

Therefore at the end of each week, Milo will take home $439.07.

Read more: Is Overtime Taxed More?

Looking for More Useful Employment Advice?

It’s just so easy to confuse the types of formal letters requested by companies. To get the best response, they need specific approaches.

With regards to cover letters, it’s well worth checking out How Long Should a Cover Letter Be, as well as How to Address a Cover Letter. Or, if you need even more in-depth information, take a look at Knock ’em Dead Cover Letters and the excellent Cover Letters Writing: The Ultimate Guide, all available online in 2023.

Or, if you’ve had enough of your current job, you might need to know How to Write a Resignation Letter. And for more useful info that is sure to put a smile on your face through the often painful process, I recommend How to Quit Your Job Gracefully, Work Sucks!: A Funny View of a Serious Problem, or the very entertaining Good Luck Finding Awesome Coworkers Like Us Again.

Final Thoughts

No tax system is simple, and the US system is often seen as more complicated than most. But working out the difference between your Gross Pay and Net Pay is crucial to ensure that you are being paid what’s due and are able to balance your budget efficiently.

There are obviously different sites that can assist you with these calculations but if you’re looking to work out the amounts on your own, make sure to check the local requirements for any rates that your need to be aware of.

Guidance for these rates can be found by visiting the Tax Summaries website.

There are a lot of terms on your payslip that may look intimidating; for a complete glossary of terms that may confuse you check out the John Gold Hammer website.

Happy calculations.