Gross vs. Net Income
What is the difference between gross and net pay?
Gross pay is the overall amount an employer pays an employee before any taxes or deductions.
Net pay is the amount the employee receives after taxes and other payments, such as health insurance or benefits, are deducted.
Most employees can see this gross vs. net pay difference clearly on their pay slips each pay period, to ensure that they know they are being fully compensated.
What is gross-to-net (GTN)?
Gross-to-net (GTN) is a process that calculates net pay by subtracting reductions and deductions from each employee's gross pay.
Is gross pay before taxes?
Gross pay is the total amount an employee earns before any taxes or deductions. Net pay is the amount an individual takes home after deducting withholdings. The difference between the two includes federal and state taxes, Social Security, Medicare, and any other payroll deductions, such as benefits or retirement contributions.
Calculating gross pay
The process for calculating gross pay varies for hourly and salaried employees. For instance, to calculate an hourly employee’s weekly gross pay, multiply their wage rate by the number of hours they worked in one week.
Then, add any additional sources of income they earned that week, if applicable (e.g., overtime pay), to arrive at their total gross income for that pay period.
To determine a salaried employee’s gross pay, divide their annual salary by the number of pay periods in a year. Salaried employees are generally not entitled to overtime pay. However, they may have other sources of income to add to their base salary (e.g., commissions and bonuses) for a specific pay period.
The following chart notes the most common pay schedules employers use:
Find more in-depth examples for calculating gross income on our HR Glossary.
Calculating income deductions
Once gross income is established, the next step in calculating net income is processing all mandatory and voluntary deductions for each employee. These deductions may include, but aren't limited to:
- Federal and state income tax withholdings
- FICA tax withholdings (these deductions fund Social Security and Medicare)
- Medical, dental, and vision benefit deductions
- Contributions to retirement plans, such as a 401(k)
- Wage garnishment payments
- Deductions for charitable organizations or savings accounts
Each paystub should display the total amount set aside for deductions with a breakdown of how much goes into each.
Calculating net pay
You can determine the take-home pay for an employee by subtracting total deductions from the gross income amount. In other words, use this net pay formula:
Gross Pay - Voluntary and Mandatory Deductions = Net Pay
Every pay stub should include these three figures. Calculating by hand can increase the risk of errors and costly wage theft penalties, so we recommend leveraging automated payroll software.
Are HRAs and stipends counted in gross pay?
Only employers can contribute to health reimbursement accounts (HRAs), which are funded on a pre-tax basis. This benefit doesn't affect the employees’ gross pay.
Meanwhile, employee stipends are generally considered taxable income because the IRS views them as supplemental wages added to an employee’s paycheck. In other words, they should be counted in gross pay, and employers must withhold applicable local, state, and federal taxes.