Gross pay vs. net pay: What's the difference?

Everybody loves getting paid, but nobody enjoys deciphering their paycheck. 

As an employer, it's essential to understand the ins and outs of gross pay versus net pay to ensure your payroll processes are transparent and compliant. Knowing these distinctions helps you communicate more effectively with your employees and manage your financial responsibilities accurately. 

In this guide, we'll break down gross pay and net pay, including the critical payroll deductions that differentiate the two to help you manage and pay salaries across global teams.

What is gross pay? 

Gross pay refers to an employee's total earnings before deductions like taxes, Social Security, healthcare, and benefits. Gross pay includes annual salaries, hourly wages, commissions, and bonuses.  

For example, consider an employee with a base salary of $50,000. If this employee earns a $5,000 annual bonus and $2,000 from sales commissions over the year, their gross pay is $57,000.  

Gross pay, typically displayed at the top of an employee's payslip, is the starting point for calculating net pay (more on that below).  

How to calculate gross pay 

Calculate gross pay according to the type of employee you are paying: hourly or salaried. Here's how to do it:  

Hourly workers 

Hourly workers earn a set pay rate per hour for their services. To calculate an hourly worker's gross pay, multiply their hourly wage by the number of hours worked during the pay period. A pay period is when an employee earns and receives payment, such as weekly, biweekly, semimonthly, or monthly.  

For example, an employee earning $25 per hour for 35 weekly hours earns $875 in gross pay per week. Use this simple formula: 

Gross pay = hourly wage × hours worked  

Salaried workers 

Salaried workers earn a fixed pay rate regardless of how many hours they work. Calculate their gross pay by dividing their annual salary by the number of pay periods within the year. 

For instance, if an employee's annual salary is $75,000 and they're paid biweekly with 26 pay periods per year, their gross pay is $2,884.62 per pay period. Try this formula: 

Gross pay = annual salary / number of pay periods  

What is net pay? 

Net pay is the final amount an employee receives after all necessary deductions are made from their gross pay. Deductions might include federal and state taxes, health insurance and retirement contributions, union dues, or wage garnishments. Net pay is also called take-home pay.  

Net pay is typically highlighted on a payslip to differentiate it from gross pay. This makes the number easily identifiable. Net pay is the actual amount of money an employee can budget and spend—the amount deposited into their bank account or otherwise remitted to them.  

How to calculate net pay 

Calculate net pay for an hourly or salaried worker by starting with the gross pay. Subtract all deductions from the gross pay, including involuntary deductions like federal, state, and local taxes and voluntary deductions like benefit-related costs. While involuntary deductions are required by law, voluntary deductions are agreed to by the employee.  

Use this formula to calculate net pay:  

Net pay = gross pay – (involuntary deductions + voluntary deductions) 

If an employee's gross pay is $4,000 monthly with $1,000 in involuntary and voluntary deductions, their net pay is $3,000. 

What's the difference between gross and net pay?  

An employee's net pay is lower than their gross pay due to involuntary and voluntary deductions. These deductions can include the following: 

Taxes 

Local, state, and federal income taxes are mandatory and set according to the government's taxation system. Calculating and deducting these taxes accurately is vital for legal compliance when paying employees.  

In the United States, these can include Federal Insurance Contributions Act (FICA) taxes, which support Social Security and Medicare. When these federal payroll taxes are paid, employees and workplaces are each responsible for half of the total contribution. For example, if an employee pays 5% to Social Security and 2% to Medicare, their workplace must match these percentages equally for a total contribution of 14% to FICA taxes.  

Retirement  

Retirement deductions are a percentage of an employee's gross income. Some workplaces offer retirement schemes to assist employees with saving for the future. These include 401(k) plans, which are tax-advantaged retirement accounts. Many workplaces match their employees’ 401(k) contributions.  

Some countries deduct a percentage of workers' salaries for state pensions. In some cases, workers can choose to pay into private or company pensions. A registered pension plan offers employees a source of regular retirement income.  

Insurance  

Many workers direct some of their gross pay to health, dental, vision, disability, and life insurance. Employees and workplaces typically cost-share these premiums, with workplaces offering insurance as part of an opt-in benefits program. In most cases, employees pay insurance premiums after taxes.  

Wage garnishments

Some employees require mandatory, court-order payroll deductions due to legal issues like debt repayment, child support, and spousal support. If an employee's wages are garnished, handle this matter with sensitivity, discretion, and compassion.  

Other deductions 

Net pay may be reduced by additional deductions like uniforms, work equipment, and union dues. Sometimes, you can give employees an allowance for these costs.

Manage payroll and pay employees with Oyster 

Oyster is a seamless global payroll solution for multi-country teams. The all-in-one, easy-to-use platform simplifies payroll processes and ensures compliance in more than 180 countries.  

Oyster guarantees more than 99% accuracy in payroll execution, letting you easily manage payroll for employees worldwide. The system saves time while reducing the potential for errors, ensuring workers are paid correctly and on time, no matter where they're located.  

Use the Oyster platform to streamline global payroll, employment, benefits, team management, and more. Try Oyster’s free employee cost calculator to see a detailed breakdown of employment costs across different countries.

About Oyster‍

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.