When employees receive their paychecks, the amount they take home is often less than what they earned. This is because their gross pay is reduced by several deductions, resulting in their net pay—also known as "take-home pay."

1. What is Gross Pay?

Gross pay is the total amount an employee earns before any deductions. It includes:

• Regular wages or salary
• Overtime pay
• Bonuses
• Commissions
• Other earnings like holiday or sick pay

2. Deductions from Gross Pay

Several types of deductions are made from gross pay. These may include:

a. Taxes

• Federal income tax
• State income tax (if applicable)
• Social Security tax
• Medicare tax

b. Benefits and Other Deductions

• Health insurance premiums
• Retirement plan contributions
• Wage garnishments (if applicable)
• Union dues (if applicable)

3. What is Net Pay?

Net pay is the amount left after all deductions are subtracted from gross pay. This is the amount the employee actually receives in their paycheck.

Formula:

Net Pay = Gross Pay - Deductions

Conclusion

Understanding how gross pay is reduced to net pay helps employees know where their money goes and ensures payroll is calculated accurately. For employers, getting this right is crucial for legal compliance and employee satisfaction.