Anyone that earns income, whether it is an annual salary or paid hourly wages will notice two different totals on your paycheck. These numbers are “net pay” and “gross pay” and they are often confused for one another. Here we will explain what gross pay is, how it is different from net pay, and explain how to calculate gross pay for both salaried and hourly paid employees.
What is gross pay?
Gross pay is the total amount an employee receives before deductions are taken out. Before taxes are taken out of an annual salary or hourly wage the total amount is the gross pay or gross income. For example, if an employer pays you an annual salary of $60,000 per year, then your gross income is $60,000.
Gross pay vs. net pay
The highest number you see on your pay statement is usually your gross pay. This amount is the agreed-upon salary or hourly wage that your employer pays you. So, if your employer agreed to pay you $20 per hour and you work for 30 hours during a pay period, your gross pay will be $600.
Net pay is the final amount of money received after all taxes and deductions have been removed. This is the amount that’s actually deposited into your bank account if payroll taxes are taken out by your employer. Your net pay usually appears in a large font on your pay statement and might be bolded to appear darker to make it easy to distinguish your net pay from your gross pay.
If taxes are not taken out of your paycheck you will be responsible for paying your taxes out of the gross amount of income, this can be done when you file your taxes or paid to the Internal Revenue Service in the form of estimated taxes quarterly throughout the year.
Deductions from gross pay
Gross income is the total amount of money you have earned annually. The annual gross income is the sum of your monthly gross pay. Gross annual income will always be larger than your net annual income because it does not include any deductions like state income tax, federal income tax, and FICA taxes. Some deductions are required and others are voluntary decisions you have made about savings or benefits.
Mandatory deductions can include but are not limited to:
- Federal income tax
- State income tax
- Local income taxes (in some cases)
- Social security and Medicare taxes (FICA)
There may be additional deductions from your paycheck required by your employer. These might include pension plans, uniforms or personal equipment necessary for your job, and even union dues. These are only voluntary in the sense that they are not federally mandated, however they might be required under your contract meaning you may not have an option to opt out of them.
If your employer offers them, other deductions that might be subtracted from your gross pay could include your health plan, health savings account, flexible savings account, 401k, or other benefits.
Any deductions that are related to savings means the money is placed in an account that you may only be able to access under specific circumstances. The money is still yours but you may have to wait until you are a certain age to access them for withdrawal, or pay a tax penalty. The amount you choose to save in these cases is up to you when making benefit selections, however your company’s HR team may be able to direct you regarding questions about these decisions.
Calculate gross income for salaried employees
Your employment contract will include your official gross pay for the year if you are on an annual salary. If you can’t find your employee contract you can calculate gross pay based on your regular pay stubs. For example, if you receive $2,000 biweekly in gross pay from your employer, you can do a simple calculation $2,000 x 2 = $4,000 per month, and multiply your monthly pay of $4,000 x 12 months to get your gross annual income of $48,000.
However, if you receive other income from your employer, including bonuses or overtime pay, your gross income will include these amounts as well. It is important to add these amounts to your monthly income to calculate your gross annual income since bonuses are often taxed at a different rate than regular income.
If you make $48,000 in gross income annually before bonuses and your employer decides to give you $12,000 in bonuses, then your total gross income is $60,000. However the $12,000 will be taxed at a flat rate of 22% while the $48,000 will be taxed lower or higher based on how you file your taxes.
Calculate gross income for wage employees
Those that earn an hourly wage can estimate their gross income for the year based on the number of hours they tend to work per week. However, if you aren’t sure how many hours you work annually, it may be easiest to calculate your gross income at the end of the year. Usually you can find your gross income for the year on your tax return statement from your employer, as well as net income if taxes were withheld. You can also calculate your gross income by adding your pay statements for the entire year once you receive your last paycheck.
If you would like to know ahead of time what your gross income is as an hourly wage worker, simply multiply the number of hours you will work each week by the total amount you earn in an hour.
For example, if you earn $15 per hour with a guaranteed 30 hours of work per week, you will have gross weekly wages of $450, multiply this by 4 (weeks per month) to get your gross monthly income of $1,800 and multiply this amount by 12 (months per year) gross annual pay of $21,600 per year.
Remember that your gross pay will decline if you take any days off, so besure to subtract those days in your calculation by multiplying the number of hours you took off by the hourly wage you receive, and subtracting this total from the gross income calculation. If you receive a raise during the year, adjust your calculation by multiplying the new hourly rate by the remaining hours you will work throughout the year and adding this to your gross income calculation.
Calculate Net Income and Desired Net Income
If you would like to know how much you will receive in net income in your bank account subtract any withholdings and taxes you will owe at the end of the year. Sometimes taxes are taken out of each paycheck so check with your employer how they file their taxes.
If you want to know how much you would need to make to keep your net income after taxes you can follow the following calculation:
Assume the desired net pay amount is $20,000, and you want to withhold social security, medicare and $4,000 for federal income tax (FIT).
- Total the sum of the tax percentages:
Social Security 6.2% + Medicare 1.45% = 7.65% - Subtract the total from 100%
100-7.65 = 92.35 - Convert that number to a percentage by moving the decimal two positions to the left
0.9235 - Add $4,000 from FIT to the desired net income:
$4,000 + $20,000 = $24,000 - Divide the new net amount by the amount in step 3:
$24,000 / .9235 = $25,988 - The gross amount to be used is $25,988.
The net amount will be $20,000 after withholding social security, Medicare, and $4,000 for FIT.
No matter what you do for a living, you will need to know the difference between net pay and gross pay so that you are fully aware of your financial obligations before taxes are due. Know how you will pay your taxes when you accept a job position so that you won’t be surprised when you receive your tax return. Knowing your net pay can help you make decisions about how you spend your money throughout the year, so that you are in good standing financially no matter what you decide to spend your money on.
The Careerbliss Team
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