Whether you’re hiring employees or looking for a new job yourself, you’ve probably encountered the term “net pay.” Usually, job ads include the gross salary or wage, but there’s a big difference between that and what you might expect to see in your bank account.
Let’s take a closer look at what net pay is, what gross pay is, and how you can find out what you will take home at the end of the week or month.
Net pay is the amount of money you take home or that is deposited into your bank account at the end of every month. Gross pay is the total amount you get paid per hour, month or annum, depending on how your salary or wage payments are structured.
So, when you see a job advertised that offers, for instance, $50,000 per annum, which is the gross salary that is being offered – but it’s not what you will actually be paid.
Before you get a paycheck to deposit in your bank account, your employer will deduct taxes, pension payments, any other benefits you pay for and any money you might owe to the company.
The amount that is left over is your net pay.
How Do You Calculate Your Net Pay?
It can be quite tricky to calculate your net pay because there are many deductions that are based on percentages. So you can’t simply deduct a flat rate from your salary to figure out what you will have to take to the bank.
First, you will need to know what the current tax rate for your tax bracket is. This will usually be a percentage, and there will probably be an exempt amount. These percentages and taxes typically change every year, and every time you get a raise, there’s a chance you will be in a new tax bracket.
If you contribute to company health benefits or a 401K or pension scheme, those payments will also be deducted from your salary before you are given your net pay.
Some employers also offer programs for training or to pay off equipment, and usually, that will be deducted from each pay check before you are paid too.
Sometimes, some of these payments might “max out,” which means that there’s a cap on how much will be deducted every year. So when you reach that limit, you might notice that your take-home net pay increases slightly for the rest of the year.
Most companies use payroll software to calculate deductions from your gross pay to get your net pay amount. There are also online tools that you can use to calculate an estimated net pay amount. However, since everyone’s situation is a little different, they might not be entirely accurate.
The best way to find out exactly how much you will take home from every check is to ask your company’s accounts department.
What Is an Example of Net Pay?
When you work for a company, you will have predefined pay periods. These are intervals between your wages or salary payments. Some companies might pay you weekly; others might pay bi-weekly, semi-monthly or monthly.
Every pay period, your employer will give you a pay slip which will outline what your gross income will be. Let’s look at a real-world example:
John works for a construction company, and he is paid every week. His hourly rate is $20, and he works 40 hours per week.
This means that his gross income for each pay period will be $800. However, he also has to pay tax at a rate of 20% and contribute $15 for company benefits. This means that his net pay will be calculated as follows:
Net Pay = Gross Pay – Deductions
Net Pay = $800 – (($800x20%)+($15))
Net Pay = $800 – ($160 + $15)
Net Pay = $800 - $185
Net Pay = $615
As you can see from the above net pay example, you need to know what the gross pay amount is, what the tax rate is, and the percentage or value of any other deductions in order to calculate what your take-home pay amount will be.
What Is a Net Take-Home Pay?
Net pay or take-home pay means the amount of money you actually get in your bank account or on a check during any pay period. It is the amount left over after any taxes, and other amounts you owe to your employer or the government are deducted from your earnings.
Another way to explain this is that your net take-home pay is the amount that you actually get from your salary or wages.
Does Net Pay Ever Change?
Sometimes, the tax structure in your area might change, which might alter the tax deductions from your income. Another way that your net pay might change is if the cost for your benefits co-pay amounts changes.
Your net pay will also increase if your gross income does, although the difference will also be taxable, so you will likely have to do another calculation to get the right amount of take-home pay.
Ask Your Accounting Department
When it comes to questions like what is net pay, how to calculate net pay and gross pay vs net pay, the best people to speak to are the ones who work in your accounting department.
If you have a particular person or team that handles payroll, it’s even better to approach them.
Sometimes, even with a detailed pay slip for the period you’re talking about, it can be complicated to understand what is being deducted and why. You might also feel that there is a mistake somewhere. The best way to address these issues is to speak to the people who do the actual calculations.
In most cases, accounting and payroll departments use preprogrammed accounting software to do complex calculations like payroll deductions. So there’s very little chance that there is human error involved – but it never hurts to ask!