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How Is Net Pay Calculated – Understanding the concept of gross pay versus net pay is important to the theory behind payroll and paychecks in any industry.
In this post, we’re breaking down the differences between gross and net pay to conjure up a crystal-clear understanding of these payroll basics and how they apply to you.
How Is Net Pay Calculated
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An understanding of gross versus net pay should begin with a more elementary understanding of gross pay.
Gross pay simply refers to the total amount of income earned by an employee during a given pay period
An employee’s gross paycheck amount will be the sum of the amount they earned before any gross pay deductions enter the payroll math.
In other words, the gross paycheck amount is what you start with before running any other calculations regarding taxes, deductions, or other consequential aspects of compensation in general.
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For an hourly employee, gross pay is the total pay accrued for each hour worked during the pay period, according to the rate negotiated with the employer.
In film production, that contract usually takes the form of a party agreement memo, but its form and language will change from situation to situation or industry to industry.
This basic definition of hourly gross pay may seem simple, but it’s important to keep in mind that there are many situations in which gross pay calculations can be a bit more complicated.
When calculating gross pay, either as an employer or employee, it is important that you do your due diligence; Make sure both hours and rates are correct before proceeding with tax or net payment calculations.
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For example, note that “hours worked” may include time for less obvious work activities, such as travel, training sessions, or meal breaks, depending on the specific circumstances of employment.
Both federal and state laws mandate that hourly employees who work more than 40 hours in a specified work week be paid overtime rates.
*Depending on the state, that factor may increase to a certain number of consecutively accrued hours (ie, if a shift goes for 12 to 14 hours, 9 to 10 hours of standard overtime or normally rated 8 hours or less).
If you have any questions about who is eligible for overtime pay, take a look through our Exempt vs. Non-Exempt Employee post.
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Let’s say Jessie works a full 40-hour work week and 5 hours of overtime at an industrial laundromat in Albuquerque at $20 an hour.
Jesse’s gross wages for that week will be calculated by multiplying the first 40 hours of work by 20, a standard rate, and the additional 5 hours of overtime by $30, the increased overtime rate.
Add those two products together and you’ll successfully calculate Jesse’s gross pay amount of $950 for a week-long pay period.
We’ll get to the question of Jesse’s gross vs. net pay in a moment, but first let’s look at how gross pay works for salaried employees.
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If you open this post asking “What is my gross salary?” Don’t stress. We’ve got you covered too.
Gross pay for salaried employees is more straightforward than for hourly employees because salaried employees typically agree to an annual gross salary amount when they accept employment.
Contracts for salaried employees determine basic gross pay amounts in advance and set terms for bonuses or other performance-based incentives that may subsequently contribute to gross pay.
In other words, “What is my gross salary?” The best general answer. Mostly “whatever you agreed to when you took the job.”
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However, calculating gross vs. net pay based on pay period takes a little more work than reading your employment contract.
The key to calculating gross pay for a salaried employee is to know the employee’s gross annual salary and the number of pay periods in a year.
For reference, a “pay period” is a given time frame for which you submit a paycheck to an employee. Generally, paychecks are cut once every two weeks, but there is no technical limit on how short the pay period can be.
Once you know the gross annual salary and the total number of annual pay periods, actually calculating the gross salary per pay period is relatively simple.
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After a tragic accident in the family, our friend Jesse leaves his rough-to-the-bone lifestyle in Albuquerque, moves to San Francisco, and moves in with his destitute brother to help care for his three children. The daughters and their remarkably smooth-haired golden retriever.
Uncle Jesse and a quirky sidekick friend have pitched their way into jobs as morning radio hosts. Unlike the laundromat, this gig is full-time and salaried.
Let’s say Uncle Jesse makes $70,000 in gross annual salary and the radio station pays their favorite disc jockey in a typical two-week pay period.
In simple terms gross pay vs net pay difference, net pay is the amount of income that ultimately ends up in your pocket.
Net Income After Taxes (niat): Definition, Calculation, Example
Net pay is what an employee earns after all gross pay is deducted. It doesn’t matter if we’re talking hourly gross vs. net pay or gross vs. net pay; As with any type of income, the basic principles of gross or net remain the same.
Certain deductions that affect the gross pay and net pay formula, such as Social Security and Medicare taxes, are mandated by FICA and automatically withheld by payroll companies.
Other deductions, such as health benefits or IRA contributions, are voluntary and are held only by mutual agreement of the employee and employer.
And from Quickbooks integration to automated union timecard calculations, it’s constantly looking for ways to innovate and improve its already superior products and services.
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While the details can get complicated, the basic method for calculating gross versus net pay is fairly simple. You can actually figure out how to calculate the gross or net payment in theory by manipulating a simple equation:
All you have to do is figure out your gross pay and total deductions and taxes, then subtract the latter from the former. The resulting number is your net salary, and it reveals everything you need to understand your gross vs. net salary.
For those trying to figure out how to calculate gross pay from net pay, it only takes a little algebra to arrive at this equation:
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Net pay using the formula with only one additional variable, then you can calculate the third variable using the same formula.
Back then, we learned that we calculate a mathematical difference by subtracting the subtrahend from the minuand, as illustrated in this equation:
And what do we get if we rewrite that equation in the adult language of gross or net payments?
In the real world, whether you’re coming from the perspective of deductions, gross pay, or net pay, the only difficult thing about calculating any variable is determining the first two of the three.
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This is especially true for deductions and taxes, which you often have to calculate independently, before you have a figure for the gross or net payment.
The first step in calculating an employee’s deductions and taxes independently of gross or net pay is to add up all of their voluntary, pre-tax deductions and subtract them from gross pay.
Voluntary deductions are any deductions an employee chooses to withhold from their paychecks that are not required by law. They are called “pre-tax” because they are removed before taxes are calculated and, thus, reduce taxable income.
Federal taxes remain constant for all individuals working within the United States, but exactly how you pay them may vary depending on your exact employment status.
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Similarly, state and local taxes can vary dramatically not only between different regions but also between different employee types.
To determine your own tax obligations or those of your employees, it is highly recommended that you either seek the advice of a tax professional or speak directly with a payroll specialist.
After accounting for voluntary deductions and any taxes, all that’s left to take out are mandatory payroll deductions.
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Wage garnishments are designed to take away part of an employee’s income and apply to certain specific needs before the employee is able to control that income for themselves.
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Once you have determined the voluntary deductions, mandatory deductions, and taxes, as well as the gross payment, you will have everything you need to determine the net payment.
In this last example, we find our friend Jesse far along the road of life.
Now, Jesse’s nieces are all grown up and living their own lives. In fact, the youngest of them has even found success as a leading fashion designer, a surprising development for Jessie, who has always known that the younger niece deserves two stars.
Faced with an empty nest and significant abandonment issues, Jessie escapes the hustle and bustle of San Francisco and makes a new home in the laid-back tri-county area. There, Jesse fights a misfit
Gross Vs. Net Pay: The Difference Between Gross And Net Income
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