Net Pay

What Is Net Pay?

Net pay is the amount of money an employer issues to an employee or non-employee contractor after any deductions and withholdings have been taken out. In other words, net pay is the sum of gross pay or wages minus deductions. On the recipient’s side, net pay is also known as "net income" or “take-home” pay, because it's the amount they receive to spend at their discretion.

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What Can Reduce Net Pay?

An employee’s net pay is impacted by both voluntary and involuntary deductions and withholdings, such as:

Employees can see an itemized breakdown of these deductions on a properly formatted pay stub, which is included with each paycheck.

What Is the Difference Between Gross Pay and Net Pay?

Gross pay is the total amount your employee has earned during a particular pay period before deductions. Net pay is the final amount the employee receives in their paycheck after deductions.

You can calculate gross pay for salaried employees by dividing the annual salary by the number of pay periods. For example, let's say an employee makes $60,000 per year and gets paid monthly. Simply divide $60,000 by 12 to figure out the gross pay ($5,000 per paycheck).

For hourly employees paid each week, you can calculate their gross pay by multiplying the employee’s hourly rate by the number of hours worked. For example, an employee making $15 per hour and working 35 hours per week would make $525 in gross pay.

Gross pay vs. net pay is more complex because net pay varies based on the employee’s income, filing status, dependents, benefits elections, court-ordered garnishments, and a host of other factors.

Why Net Pay Matters

Net pay matters for several important reasons, including:

Not only are gross and net pay records required by law, but they can also save your business from costly lawsuits and penalties that affect company profits, reputation, and more.

How to Calculate Net Pay Each Pay Period

Calculating take-home pay based on the standard net pay definition is complex because it’s unique to each employee’s situation. However, here's one five-step method for calculating net pay:

  1. Figure out how much the employee earned this pay period (gross income).
  2. Deduct pre-tax benefits contributions from the employee's gross pay.
  3. Determine taxable income after those contributions.
  4. Withhold federal, state, and local taxes from this amount.
  5. Make post-tax deductions, including court-ordered garnishments.

For example, say you have an employee in Georgia filing as a single person who makes $60,000 annually and gets paid monthly with no pre-tax benefits contributions. That works out to $5,000 in taxable income per paycheck.

To calculate their net pay, withhold roughly 22% in federal tax ($1,100), 7.65% in FICA taxes ($382.50), 4% in state income taxes ($200), and $165 for their Roth 401(k) after-tax contribution. The employee’s net pay would be $3,152.50 per paycheck.

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