Understanding the Difference Between Gross Pay and Net Pay

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It can feel like you need to learn a new language when trying to decipher payroll terms. Not only will you encounter many abbreviations, but there are common phrases that are used to refer to different aspects of payroll calculations. Many business owners don’t have the accounting or finance training to know the best ways to manage payroll. So, they choose to outsource these services instead of risking the mistakes that commonly occur when payroll processing is done in-house.

Payroll Calculations

Mark Rowley, Owner
RandR Payroll Services

Today, we are looking at the difference between gross pay and net pay. As you learn the distinctions in the calculations, then it becomes easier to identify both types of wages. Both pay calculations need to be calculated showing what the employee earns for the work that is completed. But, the distinction needs to be made because it affects the amount that is actually paid out to the employee.

The payroll processing system needs to build in calculations for withholdings and deductions that should be held out of the person’s check. These deductions include a variety of things, such as federal, state, and local income taxes, Social Security taxes, and Medicare. Sometimes, there are also non-tax deductions that need to be withheld, including garnishments, retirement contributions, and health insurance premiums.

Gross vs. Net Pay

Here is a breakdown so that you can see the difference between gross and net pay:

  • Gross Pay: The total amount the employee earns before taxes and deductions. This amount is calculated by tallying the hours that were worked and the hourly wage that is paid. Or, the calculation might be a set monthly amount if the person is salaried.
  • Net Pay: The amount that is left over after the deductions are factored into the calculations. This amount is what the employee will receive on their check or direct deposit. The net pay is always lower than the gross pay, and there are times when it is a significant difference due to the dedications that need to be held.

R&R Payroll & Bookkeeping Services has been serving local businesses in the Temecula area for nearly 30 years. If you need assistance with payroll processing, then don’t hesitate to contact the experienced team for more information: (951) 296-0412.