When payday rolls around, everyone wants to know one thing: what actually gets paid out. Breaking down gross pay and net pay makes that process clearer for everyone. For employers, it keeps payroll accurate, compliant, and on schedule. For employees, it shows where their earnings go and why. Knowing how the two connect helps both sides stay aligned and build trust across the team.
Let’s dive into what gross pay vs net pay is and how to calculate both.
What’s gross pay?
Gross pay is the full amount an employee earns before any deductions—like taxes, insurance, and retirement contributions—come out. Think of it as the starting point for every paycheck. If someone’s salary is $60,000 a year, that’s their gross income before any deductions apply. If you pay them hourly, say $20 for 35 hours of work in a week, their gross pay for that period is $700. In both cases, gross pay represents what you owe your employee based on their agreed rate or salary.
How to calculate gross pay for hourly and salaried employees
You calculate gross pay differently depending on whether you pay employees by the hour or on a salary basis. In both cases, you’re figuring out the total amount they earn before taxes and other deductions come out.
Hourly employees
Let’s start with hourly workers since their pay can change from week to week.
Step 1: Multiply the hourly rate by hours worked
Multiply the employee’s hourly rate by the total hours they worked that week. If they worked more than 40 hours, calculate overtime at “time and a half” and add it to their regular pay.
Example: An employee earns $18 an hour and works 45 hours in one week. Their overtime rate is 1.5 × $18 = $27 per hour.
- Regular pay: $18 × 40 = $720
- Overtime pay: $27 × 5 = $135
- Gross pay: $720 + $135 = $855
Step 2: Add up the total hours for the pay period
If you pay employees every two weeks, calculate each week’s pay and then add them together to get the total gross pay for that period.
Example: Using the same employee:
- Week 1: $855 (including overtime)
- Week 2: $630 (35 hours × $18/hour)
- Total gross pay: $855 + $630 = $1,485
Step 3: Include bonuses or other extra pay
Add any bonuses, commissions, and other additional income the employee earned during the pay period. The total amount before deductions is their gross pay.
Salaried employees
Now let’s look at how to calculate gross pay for salaried employees, who typically earn a fixed amount each year.
Step 1: Identify the annual salary
Start with the employee’s total yearly salary. Most salaried employees are exempt under the Fair Labor Standards Act (FLSA), so they don’t earn overtime pay for working extra hours. Their gross salary generally stays the same unless they get a raise.
Step 2: Divide the salary by the number of pay periods
Divide the annual salary by the number of pay periods in a year to find the gross amount for each paycheck.
- Biweekly: divide by 26
- Semi-monthly: divide by 24
- Monthly: divide by 12
Example:
An employee earns $60,000 per year and gets paid twice a month. Divide $60,000 by 24 pay periods:
$60,000 ÷ 24 = $2,500 per pay period.
Their gross pay for each period is $2,500, before adding any extra income.
Step 3: Add bonuses or other income
Add any bonuses, commissions, and other forms of incentive pay to the gross salary amount. Once you finish this calculation, you have the employee’s total income for the whole period. From there, you can move on to calculating net pay—the amount that actually reaches their account.
What’s net pay?
Net pay shows what employees take home after taxes, insurance, and other deductions come out of their gross pay. It’s the amount you deposit into their bank account or print on their paycheck. Say someone’s gross pay for the week is $1,000. If $250 goes toward federal and state taxes, FICA contributions, and health insurance, net pay comes to $750. On the pay stub, employees usually see this number in bold or larger font to make it easy to find. While gross pay shows what people earn, net income shows what they keep.
How to calculate net pay: 5 steps
To calculate net pay, you’ll need details like wages, tax rates, and company deductions. Follow these five steps to get an accurate total.
1. Determine gross pay
Start with the employee’s total earnings before deductions. Include base pay, overtime, and any other compensation earned during the period.
2. Subtract pre-tax deductions
Take out deductions that apply before taxes, such as health insurance premiums, retirement contributions, and flexible spending account payments. These reduce taxable income and can lower the employee’s overall tax bill.
3. Calculate income tax withholdings
Use the employee’s taxable income to figure out how much to withhold for federal, state, and local income taxes. You can use IRS or local tax tables, or an online withholding estimator, to make sure the calculation is correct.
4. Deduct social security and medicare taxes
Apply the required Federal Insurance Contributions Act (FICA) rates for Social Security and Medicare. Today, FICA equals 15.3% of wages, split evenly between employers and workers. Employees contribute 6.2% to Social Security and 1.45% to Medicare, while organizations match those same amounts.
5. Subtract post-tax deductions
Remove any deductions taken after taxes, such as wage garnishments, charitable donations, and after-tax benefits. What’s left is the employee’s net pay—the total deposited into their account.
What's the difference between gross and net pay?
At its core, the split between gross pay and net pay comes down to what happens before and after deductions. Gross pay covers everything an employee earns upfront—wages, bonuses, and commissions—before taxes and benefits come out. Net income is what remains after those deductions, including payroll taxes and health coverage.
Simplify payroll with Oyster
Understanding the gap between gross pay and net pay helps you run payroll accurately and gives employees a clearer view of their earnings. When both sides know how deductions, taxes, and contributions fit together, the process becomes more transparent and seamless.
Experience hassle-free payroll and compensation management with Oyster’s Global Payroll—our compliant, automated software designed to simplify every step. Enjoy accuracy, efficiency, and peace of mind with a platform built for global teams.
FAQ
Which is higher—net or gross pay?
Gross pay always looks higher because it includes your total earnings before taxes and deductions come out. Net income is what’s left after any withholdings.
Do employers pay gross or net?
You pay employees the full gross amount but withhold taxes and deductions before issuing their net pay. They then receive the remaining balance as their take-home pay.
About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
