What is net pay?
Commonly known as take-home pay, net pay is the income employees receive after employers remove withholdings and payroll deductions from their salary or wage. For instance, if an employee makes $9,000 per month and has $2,000 deducted for benefits and taxes, that worker's net pay would be $7,000.
These deductions can either be voluntary or mandatory. Mandatory deductions are deductions required by law, such as:
- Local income taxes
- Federal income taxes
- State income taxes
- Wage garnishments
On the other hand, voluntary deductions apply when an employee requests to pay for services like:
- Retirement savings plan
- Union dues
- Medical care
- Health savings account
For companies paying their workers either hourly or monthly salaries, it's crucial for HR professionals to know the distinction between net pay and gross pay.
Aside from helping you meet labor compliance laws, this can foster more communication and trust between you and the other employees, which can help boost employee experience.
Is net pay after taxes?
Net pay is the money employees receive after deducting taxes. An employee’s take-home pay equals gross income minus deductions, such as state, local, and federal taxes.
Net pay vs. gross pay
Gross pay, also known as gross income or gross wages, is the hourly rate or salary employees pay their workers. It reflects what employees earn before deductions.
The key difference between gross pay vs net pay is the items deducted. Gross pay includes 100% of all the wages, commissions, bonuses, and reimbursements an employee receives in a given pay period. Net pay, on the other hand, includes gross pay minus payroll deductions, such as taxes, mandatory garnishments, and benefits.
In addition to a worker's base salary, gross pay can also include overtime, holiday, and sick pay. HR specialists usually factor gross pay into their budget when determining what to pay their employees. Generally, gross pay is the basis for a worker's payroll calculations and determines a worker's net pay. It also dictates overtime pay and tax payments.
You don't have to calculate net pay or gross pay by hand. A payroll service can help you handle these calculations in addition to making deposits into workers' bank accounts and sending checks.
How to calculate net pay
Keep in mind that some payroll deductions are mandatory while others are optional. So, each employee's net pay can vary within the same job position and company.
When calculating net pay, you need to make deductions from your worker's gross pay based on applicable deductions.
Net pay = Gross pay - deductions
Below are the payroll deductions that most HR professionals factor into net pay calculations:
- Health insurance premiums
- Pre-tax contributions
- Retirement saving plans
- Court-ordered payments that can result in the garnishment of salaries, such as child support
All these factors play a pivotal role in how you calculate net income.
What HR should know about net pay
While net and gross pay calculations help determine the take-home pay for workers, they're also beneficial to HR and employers. Aside from using this knowledge to better inform the procedures for recruiting and salary negotiations, it's necessary for the company's own records and tax responsibilities.
Employers have many responsibilities when it comes to paying Social Security and Medicare taxes along with their workers. They're also needed to pay state and federal unemployment taxes. All these are taken as a percentage of the worker's gross pay. As an HR professional, knowing the breakdown of employees' net and gross pay goes a long way toward simplifying the entire payroll process.
Here's how you can help employees understand net pay:
Be clear in candidate interviews about what their gross pay and net pay will be. During interviews, clearly state what the employees will be getting as their gross pay and help them understand what their net income will be after deductions.
Help employees to get the most from their salaries. You can help employees benefit the most from their salaries and wages by offering financial planning support.
Help employees understand gross pay vs net pay. Most employees may not be familiar with terms like net pay or gross pay, and they may have questions about why their paychecks don't add up to what they've earned. To avoid this confusion and ensure your workers are satisfied, consider briefly discussing net and gross pay during the onboarding process.