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These two terms can express different things about your income.
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 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.
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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As mentioned, your net income is less because it accounts for money that has been taken out of your paycheck.
Common mandatory deductions are:
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:
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.
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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
Having a savings account is half of the financial protection battle. Life insurance is the other half.
Policygenius can help you find a life insurance policy to protect your loved ones.
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.
This post contains references to products or services from one or more of Policygenius' advertisers or partners. While these codes earn us a small fee at no additional cost to you, they do not influence editorial content and we only refer products we love.
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Yes, we have to include some legalese down here. Read it larger on our legal page. Policygenius Inc. (“Policygenius”) is a licensed independent insurance broker. Policygenius does not underwrite any insurance policy described on this website. The information provided on this site has been developed by Policygenius for general informational and educational purposes. We do our best efforts to ensure that this information is up-to-date and accurate. Any insurance policy premium quotes or ranges displayed are non-binding. The final insurance policy premium for any policy is determined by the underwriting insurance company following application. Savings are estimated by comparing the highest and lowest price for a shopper in a given health class. For example: for a 30-year old non-smoker male in South Carolina with excellent health and a preferred plus health class, comparing quotes for a $500,000, 20-year term life policy, the price difference between the lowest and highest quotes is 60%. For that same shopper in New York, the price difference is 40%. Rates are subject to change and are valid as of 2/17/17.
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