What is Net Pay?

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 payday. Thus, the net pay calculation is:

Gross pay - Payroll taxes - Other deductions = Net pay

The key elements of the net pay calculation are noted below.

Gross Pay

Gross pay 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. The gross pay concept applies to both blue collar workers and white collar workers.

Payroll Taxes (Deduction from Gross Pay)

Deductions from gross pay include 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. State governments may also impose taxes that are deducted from gross pay.

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 loans
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.

Gross Pay vs. Net Pay

Gross pay is the total amount of compensation owed to an employee, while net pay is the remaining amount owed after all deductions have been taken from gross pay. There are many deductions, so the amount of gross pay can be substantially larger than net pay.