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Know About Gross Pay and Net Pay
Know About Gross Pay and Net Pay

Business

Everything You Need to Know About Gross Pay and Net Pay

Fresher employees are usually surprised when they find out that working for 20 hours does not mean they’ll get $20 per hour. The gap between gross pay and net pay surprises them.

Gross and net pay are two terms that can be quite confusing for fresher employees. They can check stub maker and fill their w2 form online to know more about the differences between gross pay and net pay.

The difference between gross pay and net pay

In simple words, gross pay is ‘pre-tax’ pay and net pay is ‘’take-home’ pay. Let’s see both of these terms in detail.

Gross Pay

Gross pay is the total amount of pay that has been decided at the time of the interview. This is the hourly rate of compensation that has been decided upon or the monthly payment of the annual salary due to the employee. This is before taxes or other deductions are made from the salary. The gross pay cannot be lower than the mandated minimum wage or the state-approved minimum wage.

Net Pay

Also known as ‘take-home pay’, net pay is the amount an employee takes home after compulsory government-mandated deductions like federal and state income taxes. These are deducted from the employee’s pay that had been decided at the time of the interview. For example, if gross pay would be $5,000, the net pay could be up to $4,300 after deductions.

How to explain the difference between gross pay and net pay to your new employees

  • For many confused novices, the best way to help them understand the difference between gross pay and net pay is-
  • Explain the entire method of creating a paystub in the employee on boarding process.
  • Get them to fill their W2 forms online.
  • Explain how their salaries are calculated and how their payslips are made using the paystub generator. In case of any queries, get the payroll executive and company HR relations manager to resolve them.

Heads of deductions from gross pay

Pre-tax deductions- These are monies that are deducted from the gross pay so that the employee’s taxable pay is reduced. This reduces the mandatory taxes that are generated by the paystub maker. These contain deductions like child care contributions, life insurance premiums, and so on.

Mandatory taxes- These are the taxes that are to be deducted from the employee’s taxable gross pay. It includes Social Security Tax and Medicare tax at 6.2% and 1.45% respectively. These taxes are collectively known as FICA taxes.

Wage Garnishments-These are legal payments that are court-ordered to be deducted from an employee’s income. It includes back child support payments, unpaid taxes, non-taxable debts, and so on.

Wrap Up

Once you clear out with your employees the amounts that are to be deducted from their salary, you can make sure you do not have many conflicts when it comes to salary payments. The best way to reduce this is to digitize all their payroll and attendance so that there are no chances of mistakes.

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