Net Salary vs. Gross Salary: Key Differences and Examples
An employee’s salary isn’t just a number; it’s also a financial reward for their hard work and dedication. Moreover, every employee deserves to understand every specific detail about their salary, denoting the importance of pay transparency in a company.
According to a study, 62% of US companies are planning to disclose pay rate information in the future, as it shows great potential benefits and rewards related to workforce performance. Therefore, it’s the duty of the employers, especially HR professionals, to have a deep understanding of the compensation package.
A great starting point to achieve this is by knowing the difference between net salary vs gross salary. What do gross and net pay mean? What are the factors affecting them? And how do you calculate gross income and net income? Let’s find out in this article.
What is gross income?
Gross salary, also known as gross pay or gross income, is the total amount of money earned by an employee before the application of payroll deductions. It typically encompasses the total compensation an employee receives, including the base salary, bonuses, incentives, and commissions.
Example: For salaried employees, if Employee A has an annual salary of $85,000, then his gross income would be $85,000. On the other hand, if an hourly employee earns an hourly wage of $25 and works a total of 160 hours in a month, then his monthly gross pay would be $4,000.
Employers should be able to make pay decisions with confidence all the time. With the help of Compensation Software, you can now strengthen your organization’s salary structure that is both internally equitable and externally competitive.
What is net income?
The net salary, also known as net pay or net income, refers to the final salary received by an employee after all payroll deductions have been subtracted from the base salary or gross income. In short, net income is the amount of money you’ll need to deposit into an employee’s bank account, depending on the pay period. (bi-weekly, weekly, monthly, etc.)
Example: Employee B is a salaried employee earning an annual salary of $120,000. Assuming that his total payroll deduction is $33,750, how much would be the net salary? The answer is $86,250 ($120,000-$33,750).
What are the factors affecting net income?
Payroll deductions can either be voluntary or involuntary, depending on an employee’s preference and company policies. Here are some examples of payroll deductions affecting the calculation of net income:
Federal income tax: This is calculated based on a bracket system with a progressive increase depending on the income earned by an employee.
State income tax withholdings: These tax rates may vary depending on the specific US state but are also implemented through a progressive bracket system.
Social security and medicare tax: These are also known as Federal Insurance Contribution Act (FICA) taxes, with 6.2% and 1.25% tax rates for 2025.
Retirement contributions: These refer to retirement plans such as Roth IRA, 401(k), 403(b), etc.
Health insurance premiums: Employers typically cover the premiums for employee health insurance costs, but there are also instances when employees must chip in, especially for additional coverage.
Wage garnishments: These are all legal debts incurred by the employee, such as credit card debt, student loans, back taxes, medical bills, etc.
Pricing intelligence is key in crafting competitive compensation packages for your employees. With just a few clicks, Compensation Software will allow you to perform a deep analysis of your company’s existing pay structures, so you can make pay decisions with confidence.
How to calculate gross pay and net pay
To help you grasp the key differences between gross pay vs net pay better, here are a few examples and calculations:
For salaried employees:
Situation: Simon is an IT professional earning a monthly salary of $11,250. If he earns an additional pre-tax bonus of $8,000 with a standard 22% tax rate, how much would be his total gross income and net income, considering the total payroll deduction is $23,000?
Solution: To get the annual gross salary, just multiply Simon’s monthly pay by 12, then add the pre-tax bonus. On the other hand, calculating the net income requires you to subtract the total payroll deductions and apply the standard tax rate on the bonus.
Gross salary = ($11,250 x 12) + $8,000
Gross salary = $135,000 + $8,000
Gross salary = $143,000
Net salary = $143,000 - $23,000 - ($8,000 x 0.22)
Net salary = $120,000 - $1,760
Net salary = $118,240
For hourly employees:
Situation: Martha is a real estate sales agent who earns $55 per hour. She also received a total commission of $7,000 and a performance bonus of $5,000 last year. How much would her gross and net salary be if the total payroll deduction was $17,000?
Solution: To calculate the annual salary, just multiply Martha’s hourly rate by 2,080, then add all the pre-tax bonuses and commissions. Again, the net income requires you to subtract the total payroll deductions and apply the standard tax rate of 22% on the bonus and commission.
Gross salary = ($55 x 2,080) + $7000 + $5,000
Gross salary = 114,400 + $12,000 (Total bonus and commission)
Gross salary = $126,400
Net salary = $126,400 - $17,000 - ($12,000 x 0.22)
Net salary = $126,400 - $19,640 (Payroll deductions + tax rates on bonus and commission)
Net salary = $106,760
Utilizing Compensation Software will help your organization deliver on its commitment to pay transparency. It allows you to run a total compensation statement, which provides a consolidated view of an employee’s compensation, including their base pay, bonuses, and benefits information.
FAQs
Below are common questions about gross pay and net pay:
Should you use gross pay or net pay when creating a budget? Why?
For budgeting purposes, you should always use the net salary. It shows your accurate spending power, realistic budget, and helps you avoid overspending.
What are pre-tax deductions and contributions?
Pre-tax deductions and contributions are different from payroll deductions. These refer to expenses taken out of an employee’s paycheck before taxes, usually in the form of health insurance premiums and retirement plan contributions.
Since these are deducted from an employee’s gross pay before taxes are withheld, it actually helps to save money on taxes by reducing the amount of taxable income.
Is net income after taxes?
Yes, net income or net salary is also known as take-home pay. This means that all necessary payroll deductions, such as taxes and other contributions, were already implemented.
Which is higher, gross or net income?
When it comes to net salary vs gross salary, the latter will always be the higher amount since it represents an employee's total earnings before any payroll deductions are implemented.
Insights You Need to Get It Right
