The Difference Between Gross Pay and Net Pay

The Difference Between Gross Pay and Net PayThe Difference Between Gross Pay and Net PayGross pay is the total amount of money that the employer pays in wages to an employee. Gross pay is computed based on how an employee is classified by the organization. An hourly ornonexempt employeeis paid by multiplying the total number of hours worked by an hourly rate of pay. The nonexempt employees paycheck may also include payments for overtime time,bonuses, reimbursements, and so forth. Gross Pay Theexemptorsalaried employeeis paid gross pay based on the amount of her annual salary divided by the number of pay periods in a year, usually 26. For example, a salaried employee who makes $40,000 per year is paid by dividing that $40,000 by the number of pay periods in a year. In the example, the employee would receive 26 paychecks that each total $1,538.46. Any reimbursements, bonuses, or other payments would also be added to gross pay. In addition to the required payroll deductions for taxe s,Medicare,andSocial Security, the employer also subtracts voluntary deductions from an employees gross pay. Voluntary deductions to gross pay can include such items as charitable contributions and the employees contribution to the employers health care insurance coverage. Any court-ordered garnishment, whether voluntary or required by law, is also subtracted from an employees gross pay. The resultingpaycheck, after all of the required and voluntary deductionsare subtracted, is called net pay. Because the US tax laws are confusing, you might also want to talk with your state Department of Labor and/or anemployment law attorney when you venture down the road of hiring employees. Your business accounting firm is also another expert in matters relating to payroll taxes and deductions. Net Pay Net pay is the total amount of money that the employer pays in a paycheck to an employee after all required and voluntary deductions are made. To determine net pay, gross pay is computed based on how an employee is classified by the organization. An hourly or nonexempt employee is paid by the hours worked times the agreed-upon hourly rate of pay. The nonexempt employees paycheck may also include payment for overtime, bonuses, reimbursements, and so forth. The salaried or exempt employee is paid an annual, agreed-upon salary, usually in bi-weekly payments. The amount of the paycheck is determined by the total annual salary divided by the number of pay periods in a year, normally 26. From this total pay which is known as gross pay, the employer is required by law to withhold certain percentages of an employees paycheck to pay required tax withholdings. After voluntary payroll deductions are subtracted and legally required payroll deductions are subtracted, the pay that the employee receives is called net pay. Understanding Employee Deductions In all cases, to calculate the employees net pay, the amount to subtract from gross pay is determined by using the number of ded uctions declared by the employee on the W-4 form. These are used in conjunction with the tax charts provided by the Internal Revenue Service (IRS). The employees total number of deductions are determined by the number of immediate family members. A single employee can take one deduction. A married employee with two children can take four deductions. The key is to pay enough in taxes without overpaying. When an employee overpays, the government can freely use the employees money until the employee fills out an income tax return to gethis refund from the IRS. In addition to the required payroll deductions for taxes, Medicare and Social Security, the employer also subtracts voluntary deductions from an employees gross pay. Voluntary deductions from gross pay include items such as charitable contributions (for example, United Way), disability insurance, extra life insurance, and the employees required contribution to healthcare insurance coverage. Any court-ordered garnishment is also s ubtracted from an employees gross pay. Simply put, net pay is whatever is left over from an employees pay after all legally required and voluntary deductions are subtracted. Because the US tax laws are confusing, you might also want to talk with your state Department of Labor and/or an employment law attorney when you venture down the road of hiring employees. Your business accounting firm is also another expert in matters relating to payroll taxes and deductions.