Gross pay vs net pay is a common confusion for individuals trying to calculate their income. In this article, we’re going to provide you with a clear distinction between the two calculations.
Of course, we will also explain how to calculate both forms of your pay and answer common questions that we receive about income below.
This article is part of our series on banking basics, ranging from opening different types of bank accounts around the world to understanding how various aspects of the banking system operate.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Gross Pay vs Net Pay
- How Do I Calculate My Gross Income?
- How Do I Calculate My Net Pay?
- Frequently Asked Questions
- Do You Want Help Opening Accounts?
Gross Pay vs Net Pay
The main difference between gross pay and net pay is that gross pay is the total amount an individual earns before any deductions while net pay is the total amount an individual earns after all deductions.
In other words, if you are trying to calculate how much your take-home pay is after taxes and other expenses are removed from your paycheck, you will want to calculate your net pay. Net pay is your post-tax compensation.
On the other hand, if you want to know your pre-tax earnings, which is the salary you receive from your employer plus any additional employer contributions, then you will want to calculate your gross pay.
In the next sections, we’ll explain how you can calculate your gross income and your net income.
How Do I Calculate My Gross Income?
To calculate your gross income, you will need to have a few key details to start, which includes a gross amount of compensation you receive for a given period, the period of work in which it is received for, and how many of those periods you work in a year.
In other words, you need to know how much you get paid per hour in gross pay and the total number of hours that you work per year. Then you can use the following gross pay calculation in order to calculate your total annual gross income.
Hourly Gross Pay
Here is an example of how you can calculate your gross income from your hourly gross pay:
Hourly gross pay x Hours per week worked x Weeks worked per year
= Annual gross income
Salary Gross Pay
On the other hand, if you want to calculate your hourly gross pay from your annual salary, you can use the following formula:
Annual gross salary / (Hours per week worked x Weeks worked per year)
= Hourly gross pay
How Do I Calculate My Net Pay?
Calculating your net pay is more challenging, this is because net pay fluctuates depending on the specific deductions and taxes you need to pay. Not surprisingly, the taxes and deductions that each person pays varies widely. So, there is no fixed formula for calculating net pay without collecting all of the relevant information.
That said, there are a few general principles that we can share to help you calculate your net pay. With this in mind, let’s take a look at the deductions you will need to calculate in order to arrive at net pay.
What Are Considered Pay Deductions?
- Federal income tax
- State income tax
- Social security tax
- Medicare tax
- Retirement deductions
- Union dues
- Insurance premiums
- Wage garnishments
- Court order payments
In order to calculate your net pay, you need to subtract all of these (and other) deductions from the total annual gross salary that you receive.
Net Pay = Gross pay – All relevant deductions
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Frequently Asked Questions
Below are a few of the most common questions we receive from people looking into gross pay vs net pay. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
Should Gross Pay Equal Your Salary?
No, while gross pay can equal your salary it also takes into consideration money earned from all sources. In other words, gross pay will never be lower than your salary. However, gross pay can include additional streams of income above your salary.
Which Is More Net Pay or Gross Pay?
Numerically, gross pay will be a higher amount. Though, this is because it does not include the final number after all mandatory and voluntary deductions have been removed. In other words, gross pay and net pay are just a different way of looking at the same number because the final take-home pay after deductions is the same.
What Is Better Gross Pay or Net Pay?
Whether gross pay or net pay is better depends on the specific scenario that you need to provide this information. For example, in the case of account opening with a desired bank, gross pay is often sufficient and will help strengthen a profile since it is a larger number.
What Does Your Net Pay Mean?
Your net pay means the total amount of money that you take home each month after all deductions have been removed from the total gross pay amount.
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