Understanding the concept of gross pay vs net pay is critical to the theory behind payroll and paychecks in any industry.
But what does gross pay mean in practice? What is net pay in the real world?
In this post, we’re breaking down the differences between gross and net pay to conjure a crystal-clear understanding of these payroll fundamentals and how they apply to you.
Get your calculator ready. We’re about to sum this bad boy up.
An understanding of gross vs. net pay has to begin with a more elemental understanding of gross pay on its own.
So what is gross pay?
Gross pay simply refers to the total amount of income an employee has earned during a given pay period before any deductions are made.
An employee’s gross paycheck amount will be the sum of what they’ve earned before any gross pay deductions enter the payroll math.
In other words, the gross paycheck amount is what you start with before you run any other calculations regarding taxes, deductions, or any other consequential facet of compensation in general.
So if you were wondering, “is gross pay before taxes?”
The answer is a straightforward “yes.”
What is gross payment when you’re paid at an hourly rate?
For an hourly employee, gross pay is the total pay accumulated for each hour worked in a pay period, according to a rate contracted with the employer.
In film production, that contract is usually activated as a crew deal memo, but it’s form and language will change from situation to situation or industry to industry.
This basic definition of hourly gross pay may seem simple, but it’s important to keep in mind that there are several circumstances in which gross pay calculations might become slightly more complicated.
Let’s run through the basics.
To calculate basic gross pay for an hourly employee:
The resulting total is the employee’s gross payment amount.
When calculating gross pay, as either employer or employee, it’s critical that you do your due diligence; make sure that both the hours and rate are correct before moving onto tax or net pay calculations.
For instance, remember that “hours worked” may include time for several less obvious work activities, like travel, training sessions, or meal breaks, depending on the specific conditions of employment.
Similarly, the rate itself may be modified by necessary overtime calculations.
Both federal and state laws dictate that overtime rates be paid to hourly employees working more than 40 hours in a given work week.
To calculate an hourly employee’s base overtime rate:
*Depending on the state, that factor may increase with certain numbers of consecutively accumulated hours (i.e. if a shift goes for 12 to 14 hours, as opposed to standard overtime of 9 to 10 hours or the normally-rated 8 hours or less).
Once you have the overtime rate
If you have any questions about who is eligible for overtime pay, take a look through our Exempt vs. Non-Exempt Employee post.
What does gross pay mean to an hourly employee in practical terms?
Let’s look at a simplified example.
Let’s say that Jesse works a full 40-hour workweek plus 5 hours of overtime at a rate of $20 per hour at an industrial laundromat in Albuquerque.
Jesse’s gross pay for that week will be calculated by multiplying the first 40 hours of work by 20, a standard rate, and the extra 5 hours of overtime by $30, an increased overtime rate.
Add both of those products together and you’ll have successfully calculated Jesse’s gross payment amount of $950 for a weeklong pay period.
We’ll get to the question of Jesse’s gross vs. net pay in just a moment, but let’s first take a look at how gross pay works for salaried employees.
If you opened this post wondering “what is my gross salary?” Don’t stress. We’ve got you covered too.
Gross pay for salaried employees tends to be more straightforward than it is with hourly employees because salaried employees generally agree to an annual gross pay amount at the time that they accept employment.
Contracts for salaried employees dictate base gross payment amounts upfront and stipulate conditions for bonuses or other performance-based incentives that might contribute to gross pay later on.
In other words, the best general answer to “What is my gross salary?” is often “Whatever you agreed to when you took the job.”
However, calculating gross vs. net salary on a pay period basis does take slightly more work than just reading your employment contract.
Let’s start by looking at how you calculate a gross salary.
The key to calculating gross pay for a salaried employee is to know the employee’s gross annual pay and the number of pay periods that occur in one year.
For reference, a “pay period” is a given timeframe for which you submit a paycheck to an employee. Commonly, paychecks are cut once every two weeks, but there is no technical limitation on how short a pay period may be.
Once you know the gross annual pay and the total number of annual pay periods, actually calculating the gross salary per pay period is relatively simple.
All you have to do is divide the gross annual pay by the number of periods.
Sounds simple, right?
Let’s take a look at a quick example.
After a tragic accident in the family, our friend Jesse drops his bad-to-the-bone lifestyle in Albuquerque, migrates all the way to San Francisco, and moves in with his hapless brother-in-law to help take care of his three daughters and their remarkably smooth-haired golden retriever.
Thanks to the kids, our friend Jesse will now be lovingly referred to as “Uncle Jesse.”
Uncle Jesse and a quirky sidekick friend have pitched their way into jobs as morning radio hosts. Unlike the laundromat, this gig is full-time and salaried.
So what does gross pay mean to Jesse now?
Let’s assume that Uncle Jesse makes $70,000 in gross annual pay and that the radio station pays their favorite disc jockey in typical two-week pay periods.
In that case, all we have to do is divide 70,000 by 26.
Have mercy; Uncle Jesse’s gross income by pay period is $2,692.31.
Now for the comparison...
In differentiating gross pay vs net pay in the simplest terms, net pay is the amount of income that ultimately makes its way into your pocket.
Net pay is what happens to an employee’s income after all gross pay deductions have been taken out. It doesn’t matter if we’re talking about hourly gross vs. net pay or gross vs. net salary; in the case of any income type, the basic principles of gross or net remain the same.
Some deductions that impact the gross salary and net salary formula, like social security and Medicare taxes, are mandated by FICA and are automatically withheld by payroll companies.
Other deductions, like health benefits or IRA contributions, are voluntary and only held through the mutual agreement of employee and employer.
In actual practice, calculating an employee’s gross vs. net pay can become quite complicated quite fast.
Unless, of course, you run payroll through Wrapbook.
Wrapbook provides an easy-to-use, one-stop-shop for all your payroll needs and more.
Granted, here at the Wrapbook blog, we might be a little biased, so if our words aren’t enough to convince you, just check out the demo and see for yourself.
In any event, there is one bright side to the gross vs net pay equation.
While the details can get complicated, the basic method of calculating gross vs. net pay is quite straightforward. You can actually figure out how to calculate either gross or net pay in theory by manipulating a simple equation:
Net Pay = Gross Pay – Deductions and Taxes
It’s that simple.
All you have to do is figure out your gross pay and total deductions and taxes, then subtract the latter from the former. The resulting number is your net pay, and it reveals everything you need to understand your gross vs. net salary.
And, like I said, you can manipulate that equation to calculate either gross or net pay.
For those trying to figure out how to calculate gross salary from net salary, all it takes is a little algebra to arrive instead at this equation:
Gross Pay = Net Pay + Deductions and Taxes
And it follows that if you can calculate gross or net pay using a formula with only one additional variable, then you can also calculate that third variable using that same formula.
In mathematical terms, what is the difference between gross and net pay?
You guessed it. Taxes and deductions.
But let’s dive a little deeper and take a brief trip back to elementary school. Very brief. Humor me.
Back then, we learned that we calculate mathematical difference by subtracting a subtrahend from a minuend, as illustrated in this equation:
Difference = Minuend – Subtrahend
And what do we get if we rewrite that equation in the adult language of gross or net pay?
Deductions and taxes = Gross Pay – Net Pay
Again, it’s that simple. You literally could have understood it when you were 6.
In the real world, whether you’re coming from the perspective of deductions, gross pay, or net pay, the only tricky thing about calculating any of the variables is determining two out of the three of them first.
This is particularly true for deductions and taxes, which you’ll mostly have to calculate independently, before you have numbers for gross or net pay.
The first step in calculating an employee’s deductions and taxes independently of gross or net pay is to add up all of their voluntary, pre-tax deductions and subtract them from gross pay.
Voluntary deductions are any deductions that an employee chooses to withhold from their paycheck that are not required by law. They’re referred to as “pre-tax” because they are removed before taxes are calculated and, thus, reduce taxable income.
Common voluntary deductions include but are not limited to:
Next up, federal taxes.
After you’ve subtracted voluntary deductions from gross pay, it’s time to start figuring out taxes.
Federal taxes remain constant for all individuals working within the United States, but exactly how you pay them may differ depending on your exact employment situation.
Similarly, state and local taxes can differ dramatically not only between different regions but also between different employee types.
To determine your own tax liabilities or those of an employee, it’s highly recommended that you either seek the advice of a tax professional or talk directly with a payroll expert.
After voluntary deductions and any taxes are accounted for, all that’s left to figure out are mandatory payroll deductions.
Mandatory deductions are stipulated by courts, usually in the form of wage garnishments.
Wage garnishments are designed to remove part of an employee’s income and apply it to some specific need before the employee is able to control that income for themselves.
Wages may be garnished to address a variety of issues.
Here are just a few examples:
Once you’ve determined voluntary deductions, mandatory deductions, and taxes, as well as gross pay, you’ll have everything you need to determine net pay.
To illustrate, let’s check out a quick net pay example.
In this final example, we find our friend Jesse once more, much farther down the road of life.
Now, Jesse’s nieces are all grown up and living their own lives. In fact, the youngest of them has even found success as a major fashion designer, a development that’s unsurprising to Jesse, who’s always known that the youngest niece possessed two stars’ worth of talent.
Facing an empty nest and significant abandonment issues, Jesse flees the bustle of San Francisco to make a new home in the cozy Tri-County area. There, Jesse falls in with a misfit commune of semi-retired children’s entertainers, takes up yodeling, and daydreams about his long-lost love, Emily.
More to our point, Jesse’s new employment as a ranch hand throws his financial planning into an unexpected loop.
As he gets on in years, Jesse wants to save more for retirement, but it turns out that living in Tri-County comes with steep school tax liabilities, possibly as a result of a program that seeks to rehabilitate delinquent youth through the “sport” of rollerblading.
As you can imagine, this new liability pushes Jesse to the brink.
He needs to calculate his net income in order to figure out whether he can save enough money for retirement and still have the funds to live a decent day-to-day life.
Fortunately, Jesse has a new friend who might be able to help.
Sure, he’s a little delusional (he believes he was once an intergalactic police officer), but the guy knows infinitely more than Jesse about the math of local tax codes.
With his help, the process of calculating his net pay becomes relatively easy.
Now that we're clear on both, let's quickly wrap up the difference.
Before we wrap this post up, let’s summarize the difference between gross and net pay.
You’ll find a host of gross salary vs. net salary calculators with their own bells and whistles online, but when it comes to the showdown, the difference between gross and net pay is a simple matter of before and after.
Gross pay is what you have before you subtract deductions and taxes.
Net pay is what you have after you subtract deductions and taxes.
Honestly? That’s it.
Employers are responsible for paying half of an employee’s FICA taxes.
Critically, FICA taxes are calculated based on income after voluntary deductions are subtracted from gross pay but before the taxes themselves are subtracted from gross pay.
In other words, FICA taxes are calculated based on a number somewhere between gross and net pay.
This number is known as an employee’s gross taxable pay.
Because FICA is based on gross taxable pay, an employer’s tax liability is technically reduced by their employees’ pre-tax deductions, meaning that voluntary deductions can actually benefit employers as well as employees.
Keep in mind that this does not apply to those paid via 1099 invoice. In such cases, taxes are left entirely up to the individual worker, and employers are off the tax hook for that particular payment.
However, workers can still take advantage of pre-tax deductions, even if they’re paid via 1099.
For our friend Jesse, his pre-tax contributions to a 401(k) secure his financial future and allow him to rest easy, leaving him plenty of time to reminisce about his old flame, Emily, and their creepy friend, Rick, who was weirdly obsessed with their love back in the 80’s.
Whether you’re trying to become a better UPM, processing payroll for a live event, or managing employees in virtually any other industry, knowing the difference between gross pay and net pay is essential.
Now that you have gross pay down and know how to calculate gross vs net pay, why not take it one step further? Learn how to calculate overtime rates for dual pay rates in our next post.
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