NET PAY: How to Calculate Your Net Pay

Net Pay
Image Credit: Zenefits

What do you do after receiving your payslip? Do you squeeze it, quickly peep at the net pay, or carefully analyze each detail? You need to understand the difference between net vs gross pay, how it is calculated, and the items that make up your deductions. This will enable you to take charge of your finances as well as effectively manage your expenses. This guide highlights how to calculate your net pay, what it is, the key difference between gross pay and net pay, as well as the factors that affect your base pay.

What is a Net Pay?

Frank works with a construction specialty company as a louver installer. Before resuming with the company, he was told his take-home was $12,500 per month. After his first month, he receives a paycheck of $10,500. He wasn’t bothered though because, based on taxes, his 401k account, and other agreements with his employer, he was expecting that exact amount. Frank knew his gross pay is different from his net pay and that what he received as a paycheck was his accurate payment. 

Net pay is the amount of money someone makes after all deductions and expenditures have been deducted from his gross pay. It’s also known as “take-home pay,” which is the income received by employees after deductions and withholdings are deducted from their earnings. It simply means gross salary less any statutory or optional deductions. That is, your paycheck or the amount of money in your bank account after taxes, insurance, and other costs have been deducted. Generally, there are two types of deductions made on our paychecks: mandatory and voluntary. They are the main factors that reduce one’s earnings at the end of each payday

Calculate Net Pay

Since my net pay is not my actual earnings, how do I calculate it? The truth is that there’s a need to calculate your net vs gross pay as an employee to be sure the deductions on your earnings are worth it. Here’s how to calculate your net pay. Like every math problem, there’s a formula. Chill, you aren’t looking for any x, it’s not an algebraic expression. Simply identify your voluntary and mandatory amounts that need to be deducted and deduct them from your gross pay. That is

Gross Pay – Deductions = Net pay.

Step-By-Step Guide On How To Calculate Your Net Pay

The following steps are the simple ways to calculate your net pay

  • First, determine your gross pay,
  • Identify your statutory and voluntary deductions,
  • Subtract your statutory and voluntary deductions from the gross pay
  • The rest is your net payment

What are the mandatory expenses that influence net pay? 

The following are some of the mandatory expenses that affect the amount you’ll receive on payday;

#1. Federal Income Tax Levy

The federal income tax is determined using a bracket system that grows progressively with income. Evading tax is not an option, however, there are various tax benefits that we can maximize to lessen the burden of taxes 

#2. State and Local income Tax Levy

You’ll have to pay state taxes after paying federal. While there are states that use progressive tax brackets like the federal government, some do not. Well, we all know the importance of taxes, so these ones too are mandatory.

#3. Social Security and Medicare Taxes

The federal insurance contribution act (FICA), or payroll taxes, which is 7.65%, must also be paid at the rate of 6.2% and 1.45% for social securities and Medicare. 

#4. Wage Garnishments

If you are owing and finding it difficult to pay back, the court can order your employer to withhold a certain percentage of your paycheck for your debt. This occurs often with student loans, medical costs, unpaid taxes, child care, credit cards, and so on. 

What are some of the voluntary expenses that affect net pay?

 The following are some of the voluntary expenses that will affect your net pay

#1. Health insurance Premiums

Not everyone leaves their health insurance with their employer. There are employees who prioritize their health and insure it. If you are one of those people, it is a voluntary expense that’ll affect your paycheck too.  

#2. Savings for Retirement

If you are one of those already working towards their retirement, then you most certainly have a 401k account. And make contributions towards it.

Other Voluntary Expenses That Affect Net Pay 

  • Life insurance premiums
  • Dues to the union
  • Health care strategy
  • Health insurance premiums
  • Flexible spending account (FSA) contributions
  • Account for medical expenses
  • Disability insurance
  • Health savings account (HSA) contributions

Net Pay Vs Gross Pay

Before we buttress net vs gross pay, let’s find out what gross pay is.

What is Gross Pay?

An employee’s gross pay is the exact amount you’ll receive from your company before any deduction is made. They are generally your earned wages or salary for a set period in a company. If for instance, the company you work for pays you $15,000 per month, this amount prior to the deduction of any mandatory or voluntary payroll expenses is your gross payment.

How To Calculate Gross Pay

To calculate your gross pay, you need to first determine the form of payment you receive. Generally, payment comes in two ways. It’s either in the form of wages or salary. However, both represent the same number of work hours, except for extra time, which mostly comes with bonuses and incentives.

How to Calculate Your Annual Gross Income as a Salary Employee 

If you earn a salary as an employee, you’ll likely receive 12 payslips. When you go through your payslip, you’ll see a specific amount repeating itself on your monthly payslip. This does not include your bonus or incentive, which you may receive at different intervals. All you have to do is to multiply it by 12 to get your initial gross profit and then sum up your bonus reward and other incentives. You’ll arrive at the exact amount you receive as your gross pay for the year.

Net Pay Vs Gross Pay: Key Difference

What’s the difference between net vs gross pay for an employee? You guessed right, it lies in their definition. Net pay is the amount an employee receives after tax and other necessary amounts have been deducted. Gross pay on the other hand is the base wage or salary amount your employee offered you before you took up the job. Another difference in net vs gross pay is visible on the payslip you’ll receive on payday. The higher amount indicates your gross pay, while the lesser balance reveals your net pay. In between these, you’ll find the deductions made on your earnings on the payslip.

How Much of My Gross Payment Goes to Tax?

Tax is not the only thing that your employer will deduct from your gross pay. Before the deduction of taxes, certain deductions such as retirement savings are deductible. This is because they have tax benefits. The amount of gross payment that goes to taxes depends on the kind of tax in question. There are additional calculations and labor involved in calculating tax withholding, but some employ tax tables while other levies have flat rates. The four taxes deducted from your gross payment are; Federal Insurance Contribution Act (FICA), federal income tax, and state & local income tax. 

#1. Federal Income Tax Withholding

Federal income tax withholdings aren’t the same for everyone. It varies but the following are responsible for the variation in federal income tax withholding;

  • Gross Pay
  • Information on Pay Form W-4 (Every employee must fill out the form W-4 immediately after they resume. 

#2. State and Local Income Tax

State and local income taxes differ from one another. To determine your state tax allocation, contact your state.

#3. Federal Insurance Contribution Act (FICA)

Each employee’s wages are withheld at a flat rate of 7.65 percent for the FICA tax. 6.2 percent of this 7.65 percent is allocated to the Social Security tax, while 1.45 percent is allocated to the Medicare tax. 

Is net pay the amount you get paid?

Before taxes and other deductions, your income is known as your gross pay. The term “annual salary” is frequently used to refer to your annual gross income. What’s left over after deductions like income tax and national insurance are made is the net pay.

What is an example of net pay?

Before taxes and other withholdings, an employee’s gross pay is what they are paid, whereas their net pay is what they really receive after all payroll deductions.

What is net pay for a $75000?

If you earn $75,000 a year and reside in California, you will pay $19,714 in taxes. As a result, you will receive a net salary of $55,286 every year, or $4,607 per month.

Is net pay debit or credit?

Spending by a business results in expenses, which lower owners’ equity. Consequently, the normal balance of expenditure accounts is negative. Net income is positive and represents a credit balance if revenues (credits) exceed expenses (debits).

Why is my net pay so low?

Your take-home pay will decrease and your deductions from your paycheck will increase the less allowances you claim.

Is net pay before or after?

Before taxes, benefits, and other payroll deductions are deducted, an employee’s gross pay is what they are paid. Net pay, often known as take-home pay, is the sum that is left over after all deductions have been taken into consideration.

Which is better net or gross pay?

Even though your gross income is higher than your net income, you should be aware of how both impact your taxes and financial situation. While your net income might help you plan your monthly spending, your gross income is used to calculate your AGI and taxes.

What does gross pay include?

The total amount an employee receives before taxes and other deductions is known as their gross pay.


Sometimes, people think they need another job to save for their retirement or meet their financial responsibilities. But in reality, they need to understand how to calculate their net pay vs their gross pay in addition to basic financial management knowledge to achieve much or save more money. You also need to maximize every tax benefit claim available to you to get more out of your wages or salary. So do not just accept what appears on your pay slip, calculate it and plan ahead after subtracting your savings of course.

Net Pay FAQs

What is the formula for net pay?

Gross Pay – Taxes and Deductions= Net pay
When we subtract mandatory and voluntary expenses from gross pay, we will get net payment.

If I earn my gross pay is $108,000 annually, how do I determine my monthly gross pay?

Divide the $108,000 by 12 months. That’ll give you $9000 per month.

  1. 401 (k) WITHDRAWALS: Rules & 4 Ways To Avoid Penalties
  2. SOCIAL SECURITY TAX LIMIT: What is the Social Security tax limit for 2023?
  3. GROSS PROFIT PERCENTAGE: Definition, Formula & How to calculate
  4. NET 30 PAYMENT TERMS: Meaning, Examples & Reasons Why You Should Use Them or Not
  5. HOW DOES SALARY PAY WORK: How Salaried Workers are Compensated
Leave a Reply

Your email address will not be published. Required fields are marked *

You May Also Like