What is gross vs net pay?

Gross pay and net pay both express different things about your income

Have you ever noticed the pay terms gross and net on your payslip and wondered what the difference is?

Gross Pay

Gross earnings are the full earnings you make prior to any tax and other deductions. For example, if your annual salary is $45,000, then your gross salary is $45,000. On the contrary, if you’re paid hourly, then your gross pay is the number of hours you’ve worked, multiplied by your hourly wage. Your gross pay is the largest number indicated on your payslip.

Gross income is also known as the basis of your adjusted gross income, which is what’s used to calculate your taxable income.

Net Pay

Whenever you get paid, you’ll notice you actually take home less money than your gross pay. That’s because net pay reflects your earnings after all deductions were subtracted.

If you’re curious about calculating your net income, you can use this formula:

Net Pay = Gross Pay – Deductions and Withholding

For example, if you get taxed $200 on an $800 weekly pay, your net pay would be $600.

Want to learn more about banking? Read more about the different types of bank accounts here!

Why net pay is less

As explained above, your net pay is less than your gross income as it’s the earnings you take after deductions are subtracted.

Common deductions subtracted are:
– Tax
– Superannuation
– Job-related expenses

There could also be voluntary deductions taken such as donations made with workplace programs. These deductions are typically made from your gross pay, and prior to tax deducted on your earnings.

How to increase your net payment

If you’ve ever received a generous amount from your tax returns, that means you’ve received less income throughout the financial year. You may be able to increase your income throughout the year by adjusting your voluntary deductions or even decreasing your insurance premium. It’s important to note that if you were to increase your pay, you’ll most likely have a lower tax return.

Gross vs net pay in business

If you are part of a business, the gross and net income generated is used to determine profit. Gross profit is the revenue made, subtracted from the cost of goods sold.

Gross Profit = Revenue – Cost of goods sold

Net profit on the contrary also factors the operating expenses into the revenue. Unlike gross profit, net profit is calculated from the revenue subtracted from the costs of goods sold as well as operating expenses and taxes.

Net Profit = Gross Profit – All operating expenses (including taxes)