What is the difference between Gross Pay and Net Pay, and why should you know (or care!)?

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Human beings are a weird mix of genius and laziness. On one hand, we make work out massive inventions and discoveries, while on the other, tend to get too comfortable inside them, until the next wave of invention comes along.

With reference to finances too, once the concepts of money and work and salary, were in place, ways to make more money, seemed very limited. We’d been going from one major revolution to the next, and today, in an era of the internet revolution, the face of businesses and economies is undergoing a massive transformation yet again.

The internet, although being around for such a little while, has already changed the way the world functions, with opportunities widening day by day. Unless one plays along, we’re either going to have to learn to be very satisfied with what we have, or face the risk of being left behind.

After all, we are a part of a much bigger network and whether you’re on the giving or receiving end, you have to know the ever-changing rules of the game. And one rule, that remains a constant, is that when you work, for whatever stipulated amount of time, you must get paid for it at the end of the day.

Two terms that are very important to keep in mind while working towards a paycheck are: Net Pay and Gross Pay. This helps explain why, sometimes, although you are hired/hiring a person for a certain value, the actual amount that is credited to them at the end of the day may be different from the original number.

As an employee, for example, you may be hired on a CTC* of 50,000$, but, you what you actually receive, is lesser. This amount agreed upon is called your Gross Pay. Whatever amount (always lesser than the Gross Pay) that is eventually given to you, comes after deduction of mandatory salaries and allowances, in the form of what is known as your Net Pay.

*CTC – Cost to Company

So the next time you are in the process of applying for a job, or recruiting, it is important to have clarity on the matter. Using a paystub service helps eliminate the step of making the calculations by doing it for you. Additionally, a paystub service will also highlight the Net pay in a way that makes it easier to understand the monetary gains for a fixed timeframe.

To further understand both the terms:

Gross pay:

Gross pay is the total sum of the monthly salary before any deductions of overtime and promotions. Calculating gross pay for hourly employees is as simple as calculating their number of working hours and multiplying it with their hourly rate. For salaried employees, calculating their total gross pay can get slightly tricky. In this case, you need to understand the employee’s pay period. The common pay periods are weekly, bi-weekly, semi-weekly and monthly. There is not enough difference in calculating the gross pay for an hourly and salaried employee, but deductions are certain in both cases.

Net Pay / Net Salary

Net pay is the final amount an employee receives after deducting obligatory taxes and other deductions. Other deductions can also come in the form of benefits that the company offers such as like health care, life insurance, and housing. These costs are deducted from the gross pay and the calculated amount is remitted to the employee as committed. To calculate your net pay:

  1. Calculate all the pre-voluntary pre-tax of an employee that includes retirement and health care benefits. Once all the information is in order, the next step is to calculate the gross taxable pay.
  2. Calculate all the mandatory deductions that every individual of the country is obligated to pay. Subtract the amount along with the taxable gross amount you calculated in step 1, to get your Net value.

Or…simply let a pay stub services calculate these for you in a jiffy!

On a serious note, calculating the gross and net pay of every employee can get taxing, especially if the number of people working in the firm is large, or with varying paying cycles. Opting for Paystub generators has been a boon in this case. A Paystub service reduces the recurring time and effort individuals in the company have to put in these calculations, and use it more productively.

Whether an employee or employer, trust, transparency, and a sense of mutual benefit is something that goes a long way in developing loyalty. Safeguard both your interests by ensuring clarity with the gross and net pay at the time of securing a position itself. Open, honest communication is most often the secret sauce of flourishing enterprises – and you can easily be one of them!

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