Gross vs. Net Income
What Is Gross vs. Net Income?
Gross vs. net income is a comparison between the amount an employer pays an employee (gross pay) and the amount the employee takes home after deductions (net pay). Most employees can see this difference in their pay stubs each pay period through figures and calculations that help reassure them that they’re being fully compensated for their work.
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.
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 pay on our gross income glossary page.
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 paystub should include these three figures. Calculating by hand can increase the risk of errors and costly wage theft penalties, so leveraging automated payroll software is recommended.
Are HRAs and Stipends Counted in Gross Pay?
Only employers can make contributions 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.