Net vs Gross Income: What’s the Difference?

June 14, 2022

Net vs Gross Income: What’s the Difference?

The accounting world can be confusing for anyone who doesn’t work in the field. One of the biggest issues is the difference between Gross and Net Income. You will come across this quite often in various accounting processes, but one of the most common is net vs gross income. 

So if you’re wondering what the difference between Net vs Gross income is, you’re in the right place. Let’s take a look at what these terms mean and how they affect your bank account. 

What Is Better Net or Gross Income?

While you might wonder what is Net Pay and Gross Pay, when it comes to the question of which is better, there is no definitive answer. 

It’s better to ask what is Gross Pay and what is Net Pay, to begin with.

The answer to those questions is that gross pay is the total amount you earn in a particular pay period before any deductions are made. Net pay, on the other hand, is the money you take home after all deductions are made. 

Deductions might include things like medical insurance copays, the money you owe the company for advances, training or something else, taxes, pension fund contributions and so on. 

Of course, the higher your gross income is, the higher your net income will be, so while neither is better or worse than the other, it’s always good to have a higher gross income. 

Are You Taxed on Gross or Net Income?

When you are calculating net vs gross income, remember that your gross income is always the amount you are owed before any deductions are made. This means that you will always be taxed (at least when you’re talking about income tax) on your gross income. 

You might not be taxed on your full income, though. Usually, there will be a portion of your gross income that is tax-exempt. You might also be taxed at different percentages for amounts under a particular threshold and a different percentage for anything over that amount. 

It’s also good to remember that you might get some of that income tax back when you do your taxes in the form of tax refunds. So this might not be the complete picture of how much tax you will pay every year. 

How Do I Calculate Net from Gross Income?

If you want to calculate Net from gross income, it’s a fairly easy process. You simply have to add back the deductions that were taken off your pay before you were paid. 

Taxes and other deductions are usually taken off the amount you are paid before your employer pays you. They will also give you a payslip that will break down the amounts you have been paid and what has been deducted. 

You can simply add any deductions to the net amount you have received to double-check that you have been paid based on the correct gross amount. 

How to Calculate Net Income?

If you have already been paid by your employer and you have not had a raise, you should be able to look at your previous payslips to calculate what you will receive in any pay period. 

This might be more complicated if you are paid hourly, and you work overtime, which may be at a different rate. There might also be a slight difference if you are paid semi-monthly instead of a fixed payment period like bi-weekly or monthly. 

There are also online calculators that can help you to determine what you are going to be paid during a particular pay period. 

Are Jobs Advertised with Net or Gross Pay?

Another big question many people ask when it comes to net vs gross income is whether jobs are advertised with the net or gross pay amount. 

In most cases, jobs are advertised with the total amount offered, not the take-home pay. So the figure you see on the job ad will be the gross amount, and you still have to factor deductions into the equation. 

This also means that if you are negotiating your wages or salary, it’s better for you to focus on your take-home amount. This means that your employer will have to add those amounts to reach your gross pay amount instead of deducting them from that amount. 

Does Net Pay Ever Change?

Another important question in the net vs gross income situation is whether net pay ever changes. There are several ways that your net pay might change, including:

  • If one or more deductions increase or decrease
  • If you have “maxed out” your contributions during the year – sometimes, you only have to contribute up to a certain amount, and if you earn more than that, you will stop contributing for the year
  • If your gross income increases, your net income will increase too
  • If the tax percentage for your tax bracket increases or decreases
  • If you are paying something off that includes interest at the prime lending rate – when the interest rates change, so will your payments

As you can see, there are many factors that you need to understand when it comes to net vs gross income. 

While the difference between gross pay vs net pay might seem unfair, it’s standard in the accounting world. There are always deductions and reductions in the gross version of anything in order to get to the net amount. 

If you have any questions about your wages or salary, it’s always best to take them to your accounting department and check the Profit & Loss report. Accountants can show you exactly how the calculations are done and what you can expect to receive as your net income in a particular pay period. 

The rule of thumb for anything in the accounting and financial world is always that gross will be more than net, though. So if you’re ever told a gross figure, expect the actual check or payment to be less than you were told. 

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