Get 50 free money moves.
Sign up for the free ebook from Easy Money by Policygenius.
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.
Recession-proof your money. Get the free ebook.
Get the all-new ebook from Easy Money by Policygenius: 50 money moves to make in a recession.
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.
Need a place to stash that cash and earn a lot of interest? Try Fiona, a Policygenius partner, to find a high-yield savings account.
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 tax credits or deductions 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.
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
About the author
Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
Was this article helpful?
We make it easy to compare and buy insurance.
Security you can trust
Yes, we have to include some legalese down here. Policygenius Inc. (DBA Policygenius Insurance Services in California) (“Policygenius”), a Delaware corporation, 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 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.
Copyright Policygenius © 2014-2020