Glassdoor* says it’s important for people to truly understand their incomes and breaks down the difference between gross pay and net pay.
Your pay is your pay, right? Wrong!
There are actually two different kinds of pay: gross and net. (And if you’ve ever spent time examining your pay stub, you’ve likely seen them.)
But what are these different numbers, why do they matter, and how are they calculated?
What is gross pay?
Depending on the work you do and how you’re compensated, you may earn money a variety of ways, from your salary or wages, commissions, bonuses, or tips, for example.
These payments make up your gross pay—before any deductions, like taxes, are taken from your paycheck.
For example, if your salary is $50,000 a year and you earned a $5,000 bonus, your gross pay is $55,000.
If you’re looking for your gross pay on your paystub, it should be clearly labelled.
But if it’s not, it’s very likely the highest number, as its all your various forms of income combined.
What is net pay?
While your gross pay is your combined income before any deductions, your net income is your income after those deductions have been taken out.
There are many deductions that can come out of your paycheck, and they can include: taxes, retirement contributions, healthcare insurance, life insurance, pre-tax savings accounts (such as HSAs and FSAs) and childcare spending accounts.
Net pay is what you actually take home.
So, while in our example above, you make $55,000 per year, your net pay will be less, because it will be what is left after any deductions are removed.
Some deductions are mandatory, such as federal and state taxes and deductions required by your employer; other deductions may be voluntary, such as retirement contributions or life insurance.
How do i calculate gross pay if i’m salaried?
How you calculate your gross pay will depend on how you earn your income—whether you are a salaried or hourly employee.
If you’re a salaried employee, here’s how to calculate gross pay:
Your gross pay will include the salary included on the contract between you and your employer, as well as any other payments outlined in that agreement—including commissions and bonuses.
If you don’t earn any other income from your employer other than your salary, you can simply refer to your pay stub to calculate your gross pay.
It will show your gross pay for the pay period, and you can do the math to figure out your yearly gross pay.
For example, let’s say you’re paid every two weeks (or 26 times a year) and your gross pay for the two-week pay period is $2,000.
You would multiply $2,000 by 26 to get your yearly gross pay, which comes out to $48,000.
If you do earn other income from your employer, such as bonuses, you will need to include those payments when calculating your gross income.
For example, if your salary is $48,000, but you earned a $2,000 bonus, your gross pay is actually $50,000—your $48,000 salary plus $2,000.
How do i calculate gross pay if i’m hourly?
Calculating gross pay for hourly workers can be tricky—especially if you don’t know how many hours you’ll work each year.
If you don’t know how many hours you’ll work this year, you may need to wait until you receive your last paystub to see your yearly gross pay.
(Your yearly gross pay will be included on it.)
But if you are guaranteed a certain number of hours each week from your employer, you can calculate your gross pay now.
Here’s how to calculate your gross pay:
Take the number of hours you work each week and multiply that number by your hourly wage.
For example, if you work 32 hours a week and earn $16 an hour, you’ll get $512, which is your gross weekly pay.
To get your gross yearly pay, take your weekly number and multiply it by the number of weeks you’ll work in a year.
So, if you will work 50 weeks this year—leaving room for a two-week vacation—you would multiply $512 by 50 and get $25,600 for your gross pay.
*Glassdoor is one of the world’s largest job and recruiting sites. headquartered in Mill Valley, California
This article first appeared at glassdoor.com
