Career Planning Succeeding at Work Pay & Getting a Raise Understanding Gross Pay and Net Pay As an Employer, You Will Want to Work With an Attorney Once You Hire By Susan M. Heathfield Susan M. Heathfield Susan Heathfield is an HR and management consultant with an MS degree. She has decades of experience writing about human resources. learn about our editorial policies Updated on August 8, 2020 In This Article View All In This Article Gross Pay Net Pay Understanding Employee Deductions Photo: JGI/Jamie Grill/Blend Images/Getty Images Gross pay is the total amount of money that the employer pays in wages to an employee. According to the Internal Revenue Service, "This includes all income you receive in the form of money, goods, property, and services that is not exempt from tax. It also includes income from sources outside the United States (even if you can exclude all or part of it)." Gross pay is computed based on how an employee is classified by the organization. An hourly or nonexempt employee is paid by multiplying the total number of hours worked by an hourly rate of pay. The non-exempt employee's paycheck may also include payments for overtime time, bonuses, reimbursements, and so forth. In a simple example, Simon works 40 hours in a 5-day week, 8 hours per day. His hourly rate is $15.00 per hour. If no bonuses or other payments are provided this week, his gross pay for the week, before deductions, is $600.00. Gross Pay The exempt or salaried employee is paid gross pay based on the amount of her annual salary divided by the number of pay periods in a year, usually 26. For example, a salaried employee who makes $40,000 per year is paid by dividing that $40,000 by the number of pay periods in a year. In the example, the employee would receive 26 paychecks that each total $1,538.46. Any reimbursements, bonuses, or other payments would also be added to gross pay. Note In addition to the required payroll deductions for taxes, Medicare, and Social Security, the employer also subtracts voluntary deductions from an employee's gross pay. Voluntary deductions to gross pay can include such items as charitable contributions and the employee's contribution to the employer's health care insurance coverage. Any court-ordered garnishment, whether voluntary or required by law, is also subtracted from an employee's gross pay. The resulting paycheck, after the required and voluntary deductions, are subtracted, is called net pay. Because the US tax laws are confusing, you might also want to talk with your state Department of Labor and/or an employment law attorney when you venture down the road of hiring employees. Your business accounting firm is also another expert in matters relating to payroll taxes and deductions. Net Pay Net pay is the total amount of money that the employer pays in a paycheck to an employee after all required and voluntary deductions are made. To determine net pay, gross pay is computed based on how an employee is classified by the organization. An hourly or nonexempt employee is paid by the hours worked times the agreed-upon hourly rate of pay. The non-exempt employee's paycheck may also include payment for overtime, bonuses, reimbursements, and so forth. The salaried or exempt employee is paid an annual, agreed-upon salary, usually in bi-weekly payments. The amount of the paycheck is determined by the total annual salary divided by the number of pay periods in a year, normally 26. Note From this total pay which is known as gross pay, the employer is required by law to withhold certain percentages of an employee's paycheck to pay required tax withholdings. After voluntary payroll deductions are subtracted and legally required payroll deductions are subtracted, the pay that the employee receives is called net pay. Understanding Employee Deductions In all cases, to calculate the employee's net pay, the amount to subtract from gross pay is determined by using the number of deductions declared by the employee on the W-4 form. These are used in conjunction with the tax charts provided by the Internal Revenue Service (IRS). The employee's total number of deductions are determined by the number of immediate family members. A single employee can take one deduction. A married employee with two children can take four deductions. The key is to pay enough in taxes without overpaying. When an employee overpays, the government can freely use the employee's money until the employee fills out an income tax return to get his or her refund from the IRS. Note In addition to the required payroll deductions for taxes, Medicare, and Social Security, the employer also subtracts voluntary deductions from an employee's gross pay. Voluntary deductions from gross pay include items such as charitable contributions (for example, United Way), disability insurance, extra life insurance, and the employee's required contribution to healthcare insurance coverage. Any court-ordered garnishment is also subtracted from an employee's gross pay. Simply put, net pay is whatever is leftover from an employee's pay after all legally required and voluntary deductions are subtracted. Because the US tax laws are confusing, you might also want to talk with your state Department of Labor and/or an employment law attorney when you venture down the road of first hiring employees. Your business accounting firm is also another expert in matters relating to payroll taxes and deductions. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Internal Revenue Service. "Gross Income." Accessed August 7, 2020. Internal Revenue Service. "Module 1: Payroll Taxes and Federal Income Tax Withholding." Accessed August 7, 2020.