Gross vs. Net Income

What is Gross vs. Net Income?

Gross income is the total amount earned, and net income is the actual profit or take-home amount. Since they can often be confused, Employers who familiarize themselves with these two terms are often better equipped to negotiate salaries with workers and run payroll effectively.

Knowing the distinction between these two types of income helps businesses evaluate their financial status and assess how their business is doing. These numbers also have a huge impact on how taxes are paid. Understanding how gross income and net income are defined is important to understand their key differences.

While the gross income is higher than the net income, its’ important to understand how both affect taxes and the budget. Gross income helps determine the adjusted gross income and taxes, while net income can help create a monthly budget. Both are important parts of an employee’s finances, so it’s important to know what those amounts are. Taking the time to understand what is earned can help prepare for a future that is financially sound.

How do you calculate Gross Income?

Gross income for employees, also known as gross pay on a paycheck, is an employee’s total earnings before taxes or other deductions. It is their take-home pay. This includes other sources of income such as pensions, interest, dividends, and rental income. The gross amount is part of the employee’s income tax return, and after certain deductions and exemptions, it becomes the adjusted gross income, then taxable income.

How do you calculate Net Income?

To calculate a net amount, multiply the gross by the tax rate, then subtract these results from the gross.

Net Income = Gross Income – Deductions

Deductions usually include federal income, unemployment, social security, and medicare taxes as specified by FICA (Federal Insurance Contributions Act).

Conclusion

Processing an employee’s pay correctly can be challenging without the latest information and the right experts who continue to monitor ever-changing regulations. Therefore, when it comes to employees’ pay, it’s important to be well-versed on all forms of payroll deductions and to explain how they work, while having a full understanding of the rules around the deductions.

For additional information, see terms entitled Gross Wages, Gross Pay, Gross Income, Gross-To-Net Income.