What is net pay? How it works, how to calculate it and its difference from gross pay

Olivia Munson, USA TODAY
Updated ·2 min read

Tax season is nearly upon us. For some, it may be your first time filing taxes. And even for those who have filed for years, taxes are not always the easiest task to tackle.

Here's what you should know about net pay, what it is, how to calculate it and the difference between gross pay vs. net pay.

What is net pay?

Net pay is the amount of money employees earn after payroll deductions are taken away from gross pay. These includes taxes, benefits, wage garnishments and other deductions.

In simple terms, net pay is the money you take home directly from your paycheck.

For example, if someone gets paid $1,200 per week but $160 is taken away by deductions, the person's net pay will be $1,040 per week.

What is gross pay?

Gross pay is an employee's total earned wages before payroll deductions.

What is net income?

Net income, also known as net earnings, is the total revenue of a company minus operating costs. This includes the cost of goods, taxes, interest, operating expenses, selling, general and administrative expenses and depreciation.

Net income is used as a measure of profitability.

For employees, what you need to know about net pay

Net pay is what you take home. Even if you have the same salary as someone, that doesn't mean you will have the same net pay. Net pay is affected by certain taxes, benefits, wage garnishments and other deductions.

Someone's net pay can be different than yours based on their marital status, filing status, tax credits, children and dependents, among other factors.

For employers, what you need to know about net pay

As for employers, there are certain things to consider when it comes to your employees net pay. For example, retirement plan contributions, benefits and employer FICA taxes are not included in someone's net pay and deducted before an employee receives it.

Additionally, net pay does not refer to the amount it costs to employ, rather it is the amount an employee takes home.

Keeping track of your employee's net pay and gross pay is also important for tracking payroll taxes. If there are any inconsistencies between the two, you may want to verify the information. If there are any issues, this could result in penalties.

More of your tax season questions answered

This article originally appeared on USA TODAY: What is net pay? Here's how it works and how to calculate it

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