What’s the difference between gross pay and net pay?
Understanding the difference between gross pay and net pay is key to knowing how much money you’ll receive on pay day. It’s also important for understanding your taxes, and can help you budget for your monthly living expenses. Here, we’ll explain the key differences between gross vs. net salary and share how to calculate it. Let’s go!
Gross pay is the amount of money an employee receives from a company before any deductions—such as health insurance, taxes, or student loan payments—are taken out. When a job is advertised, the salary offered is usually listed as the gross pay. This is also sometimes known as your base salary, and excludes any short or long-term incentives or benefits. Net pay is the money left once taxes and deductions have been taken out of your gross pay. This is the amount that is paid into your bank account and constitutes your income.
If you’re a salaried employee, you will typically receive a breakdown of your salary each month on your payslip. Gross pay will usually be shown here—this is the higher figure and is often listed at the top of the slip. All taxes and deductions will typically be listed below it. Next to each of these items, you’ll see an amount of money, which is what will be deducted from your gross salary. The figure left after this is your net pay.
Can You Find Adjusted Gross Income on Your W-2?
If you’re a salaried employee, income from your employer gets reported and sent to you on a W-2 form. In Box 1, you’ll find your total “wages, tips, and other compensation.” However, it’s important to note that this amount is not your adjusted gross income.
Box 1 of your W-2 form is your total taxable income from that employer. It doesn’t consider certain above-the-line deductions that go into calculating your adjusted gross income. For example, your total “wages, tips, and other compensation” don’t account for the money you pay for school tuition or interest toward student loans.
If you work part-time for two employers or you switch jobs during the year, you’ll receive multiple W-2 forms (one for each employer). You may also have sources of income that aren’t reported on a W-2, such as income from a rental property that you own.
Examples of Gross Income Calculations
Understanding equations can give you a good general idea about how to go about figuring out your individual or company’s gross income. Seeing these equations applied to relevant examples can further this understanding and help you use the formulas in your own life.
Samantha works at a restaurant as a waitress 25 hours a week, where she earns $9 per hour. In addition to her hourly wage, she receives an additional $125 in tips every week on average.
Samantha is applying for a credit card and has been asked to provide her gross income per month to confirm her eligibility. She uses the following equations to find her gross monthly income and apply for the credit card.
First, Samantha determines her weekly pay by multiplying her hourly wage by how many hours she works per week.
25 Hours Per Week X 9 Dollars Per Hour = $225 Weekly Payroll
Since Samantha makes tips every week, she adds the number of tips she makes per week to her weekly pay.
225 Hourly Pay + 125 In Tips = $350
Then, she finds her annual salary by multiplying her weekly pay by 52.
350 Dollars Per Week X 52 = $18,200 Annual Salary
Finally, she divides her annual salary by 12 to determine her gross income per month.
18,200 Annual Salary / 12 = 800,516.70 Monthly Gross Income
James works for Kingston Dental Group as a full-time office manager. He earns an annual salary of $60,000 per year for his supervisory role. In addition to his salaried position, James works freelance doing translation services on the side, which earns him an extra $700 per month.
James is planning on buying his first house with his wife and wants to consider his finances to determine what their budget should be and if they can fulfill loan requirements. He decides to calculate his gross monthly income to make the decision.
To arrive at his gross income per month, James divides his annual income by 12.
60,000 Dollars Per Year / 12= $5,000 Gross Income Per Month
Since James also receives monthly earnings from his freelance graphic design work, he adds that income to his gross monthly income.
5,000 + 700 = $5,700
With this information, James and his family can decide how much they can afford to pay on their mortgage per month and what their budget limitations should be.
Children’s Illustration Organization: 800,000 Per Month Set Rate
Nature Wildlife Magazine for Kids: $16 Per Hour for 20 hours a week
Digital Album Design: $150 per Project with 5 Projects per Month
Source:
https://n26.com/en-eu/blog/gross-pay-vs-net-pay
https://www.hourly.io/post/adjusted-gross-income
https://www.zippia.com/advice/gross-monthly-income/