Net Pay: Definition, Formula and How to Automate It

7 of September, 2022

The net pay status of an employee is dependent on them being hourly wage earners or salary earners. On one hand, salary earners are mostly exempt from the Fair Labor Standards Act (FLSA) and could be given special bonuses for the extra work they might have put in. On the other hand, hourly wage earners are non-exempt from the FLSA and would be paid the minimum federal wage. They are also qualified for overtime payment which is the payment given to them for working over 40 hours a week. 

What is Net Pay?

According to Accounting Fundamental Principles, net pay is the amount of money your employees earn after all deductions are subtracted from their gross pay; also called take-home pay.

This is the paycheck that an employee will receive after all deductions have been taken out. Some of such payments include the Federal Insurance Contribution Act (FICA) mandated social security tax, health insurance, retirement savings, and so on. The net pay of an employee is whatever is left and paid to the employee. With this in mind, what is gross pay?

Gross Pay vs Net Pay

The difference between Gross and take-home pay is quite easy to understand.

Net pay is the amount paid to an employee after all necessary deductions have been made. In that case, gross pay is the total amount of money offered to be paid to an employee before all of those deductions are made. 

For instance, if an employee earns about $10,000 every month, and the amount deducted from the payment before it’s given to the employee sums up to $2000 for income taxes, social security taxes, pension contributions, FICA taxes, and the likes of these. The balance of $8000 paid to the employee is what is referred to as net pay. While the total sum of $10,000 before all the deductions was made is called the gross pay.

So next time you see a job posting that offers $20,000 pay, know that that’s probably the gross pay.

How to Calculate Net Pay

Calculating this is quite straightforward as explained earlier. If you have to use a formula, then it can be calculated as:

Net Pay = Gross pay – Deductions 

How to Automate Payroll?

Knowing the take-home pay of an employee is quite crucial for a company. However, keeping up with this can be quite a hassle. Especially for large organizations with a large staff considering that they have a large payroll. 

This doesn’t have to be an issue. HR Software programs exist to help you automate payroll. Sesame’s payroll variations for example, makes it effortless for payroll information to be easily reviewed and sorted. Try our tool for free. Book a Demo now.