Net pay is the amount of pay remaining for issuance to an employee after deductions have been taken from the individual's gross pay. This is the amount paid to each employee on pay day. Thus, the net pay calculation is:
Gross pay - Payroll taxes - Other deductions = Net pay
The key elements of the net pay calculation are:
- Gross pay. This can be the total amount of wages and overtime earned, or the total amount of salaried compensation. It may also include other forms of compensation, such as commissions and bonuses.
- Payroll taxes (deduction from gross pay). This is the government-mandated amounts of payroll taxes to be deducted from employee pay and forwarded by the employer to the government. Typical payroll taxes are the social security tax and Medicare tax.
- Other deductions (deduction from gross pay). There are a large number of possible deductions that a company can make from employee pay, usually to pay for benefits, garnishments, or the repayment of loans. Examples of these other deductions are:
- Garnishment for spousal support
- Garnishment for child support
- Garnishment for unpaid taxes
- Garnishment for unpaid debts
- Employee-paid portion of medical insurance
- Employee-paid portion of life insurance
- Employee-paid portion of dental insurance
- Employee pay back to company of advances
- Employee pay back to company for goods purchased on behalf of the employee
- Deduction for stock purchase plan
- Deduction for 401(k) or similar pension plan
- Deduction for trade union dues
- Deduction for charitable causes
Thus, if an employee had $1,000 of gross pay, less $62 for social security taxes, $29 for Medicare taxes, $100 for medical insurance, and $10 in union dues, that person's net pay would be $799.
The derivation of gross pay, as well as all deductions, are included in the remittance advice that accompanies a payment to an employee, so the employee can see how his or her net pay figure was calculated.
Net pay is also known as take home pay.