What is Net Pay?
After all deductions and withholdings have been deducted, net pay is the amount of money an employer issues to any employee or non-employee contractor. To put it another way, net pay is the difference between gross pay and deductions. Net pay, often known as net income or "take-home" pay, is the amount received by the recipient to spend at their discretion.
What is the difference between Gross pay and Net pay?
Gross pay is the amount employees make before taxes and other withholdings, but their net pay is the amount they take home after all payroll deductions. For example, if an employee's gross pay is $8,000 per month and $1,700 is deducted for taxes and benefits, the employee's net pay is $6,300. The following forms of withholdings account for the difference between gross and net pay:
- State, federal or local income taxes
- Social Security Tax
- Medicare tax
- Retirement savings plan
- Health benefits, including vision, dental, etc.
- Wage garnishments
- Union dues
- Insurance (life, accident, etc.)
How to calculate Net pay
Calculating net pay is an essential part of managing payroll. Here are the basic steps:
- Calculate gross pay
- Deduct pretax contributions to certain types of health and retirement plans
- Withhold all federal, state and local taxes
- Garnish wages from disposable income, if applicable
- Deduct post-tax contributions to benefit plans or unions
- The result is net pay