Gross pay and net pay answer two different questions. Gross pay is what the worker earned before taxes and deductions. Net pay is what remains after the applicable amounts are subtracted.
Start With Gross Earnings
For an hourly worker, regular gross earnings are commonly calculated as hours multiplied by the regular rate. Overtime, bonuses, commissions, tips, shift differentials, and other earnings may be added as separate lines. Salaried workers generally begin with the salary amount allocated to the pay period.
Basic review formula
Gross earnings – taxes – other deductions = net pay
Gross Pay Is Not Always the Same as Taxable Wages
Certain pre-tax benefits can reduce the wage base used for a particular tax without changing the original gross earnings line. Different taxes can also use different wage bases. That is why tax amounts should come from current payroll records, approved software, or official methods rather than a rough percentage.
Common Deduction Categories
- Federal income-tax withholding
- State and local income-tax withholding where applicable
- Social Security and Medicare
- Health, dental, and vision benefits
- Retirement contributions
- Garnishments and support orders
- Union dues or other properly authorized deductions
How to Check the Math
- Add every current-period earning line to confirm gross pay.
- Add taxes and other deductions separately.
- Subtract total deductions from gross earnings.
- Confirm that the result equals net pay.
- Compare current-period amounts with the change in YTD totals.
If the numbers do not reconcile, return to the source payroll information. Never insert a miscellaneous deduction merely to force net pay to match.