Tax season is just around the corner. With all the paperwork and forms required, it can get overwhelming.

Whether this is your first time filing taxes or you’ve been doing it for years, keeping track of your earnings over the tax year is crucial. This will simplify the process of calculating what you owe to the IRS (or what you might get back).

Here’s a guide on net pay: what it is, how to calculate it, and the differences between gross pay and net pay.

What does net pay mean?

Net pay refers to the money employees receive after all payroll deductions have been made from the gross pay. These deductions include taxes, benefits, garnishments, and other withholdings.

In simple terms, net pay is what you actually take home from your paycheck.

For instance, if someone earns $1,200 weekly but has $160 deducted for various reasons, their net pay would be $1,040 each week.

What does gross pay mean?

Gross pay is the total salary an employee earns before any deductions are taken out.

What is net income?

Net income, or net earnings, represents a company’s total revenue minus its expenses. This encompasses costs like goods sold, taxes, interest, operational expenses, and depreciation.

Net income is commonly used as an indicator of profitability.

Key information about net pay for employees

Net pay is the amount of money you take home. However, even if two people earn the same salary, their net pay can differ. This discrepancy can arise from various deductions related to taxes, benefits, and garnishments.

Your net pay may vary compared to someone else based on factors like marital status, tax credits, and the number of dependents.

Key information about net pay for employers

For employers, it’s important to understand the various elements that influence employees’ net pay. For instance, contributions to retirement plans and employer-paid taxes are deducted before determining net pay.

Net pay does not reflect the total cost of employment; it’s simply the amount that employees actually receive.

Monitoring both gross and net pay is essential for managing payroll taxes effectively. Any discrepancies should be reviewed, as they might lead to regulatory issues or penalties.