What is gross vs net pay?

If you’ve ever looked at your pay stub, you may have seen the terms “gross pay” and “net pay” and wondered what they mean and how they’re different. Of these two, gross earnings are higher, but unfortunately aren’t what you’ll be taking home in your paycheck — that would be the net earnings.

In this article:

• Gross pay
• Net pay
• Gross vs net pay in business

Gross pay

Gross earnings are how much you make before taxes and other deductions have been accounted for. If your annual salary is $70,000, then your gross salary is $70,000. If you are paid hourly wages, then your gross pay is the hourly rate multiplied by the number of hours you worked. Your gross pay is the larger number indicated on your pay stub.

Gross income is also the basis of your adjusted gross income or AGI, which is needed to calculate your taxable income.

Net pay

When you get paid, either by check or direct deposit, you've probably noticed that your take-home pay is a lot less than the gross pay. Or, at the end of the year when you file an income tax refund, you might have noticed that your actual income falls short of what's stated in your contract or offer letter.

That's because net pay, or net earnings, reflects your wages after deductions and other withholdings have been subtracted from it.

You can calculate your net income with this formula: Net pay = Gross pay - deductions and withholdings

For example, if your gross salary is $70,000, your net salary might actually be closer to $55,000.

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Why net pay is less

As mentioned, your net income is less because it accounts for money that has been taken out of your paycheck.

Common mandatory deductions are:

• Federal income tax
• State and local income taxes
• Social security and Medicare tax (known collectively as FICA tax)

There are also some voluntary deductions you might take. Many of them (like health insurance benefits and retirement savings accounts) might be associated with employer-offered programs. These deductions are made from your gross pay, before tax is calculated on your earnings. So even though your paycheck feels lighter because of these deductions, you are actually saving money in the long run because you’re using pre-tax dollars.

Voluntary deductions may include:

• 401(k) or other retirement account withholdings
• Health insurance premiums
• Commuter benefit payments
• Health savings account (HSA) contributions
• Flexible savings account (FSA) contributions
• Union dues

How to increase your net pay

If in the past you’ve received a considerable tax refund, it means that you received less income throughout the year than you should’ve. You might be able to counter these lower paychecks and increase your net earnings by claiming any applicable credits or exemptions or adjusting your withholding. Your employer will withhold less tax, increasing your net pay. You will, however, receive a smaller income tax refund, if any at all, if you did the math correctly.

Gross vs net pay in business

In a business context, gross and net are used to describe profit, or how much money or income is generated. Gross profit is the revenue minus the cost of goods sold.

Gross profit = Revenue - costs of goods sold

Net profit, or net income, factors operating expenses into the revenue as well. It’s the revenue minus costs of goods sold and operating expenses like taxes.

Net profit = Gross profit - all operating expenses, including taxes

Policygenius’ editorial content is not written by a certified financial planner or advisor. It’s intended for informational purposes only and should not be considered legal, financial, or investment advice. Consult a professional to learn what financial products are right for you.

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