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Whether you earn a salary or hourly wages, you may notice two different numbers on your paycheck. These two numbers are commonly referred to as “net pay” and “gross pay.”
In this article, we’ll provide more details about what gross income is, what it means for your monthly and annual income and how to properly calculate your income when looking at gross salary.Gross Pay vs. Net Pay
Your gross pay will often appear as the highest number you see on your pay statement. It is a reflection of the amount your employer pays you based on your agreed upon salary or hourly wage. For example, if your employer agreed to pay you $15.00 per hour and you work for 30 hours during a pay period, your gross pay will be $450.00.
Net pay is the amount of money that will finally be available to you. Using our last example, if you earned $450.00 in gross pay, your net pay will be the amount that ends up in your bank account after taxes and other fees have been taken out.
In most cases, your net pay appears in larger font on your paycheck or pay statement and is often bolded to appear darker so that you can easily distinguish it from your gross pay.
Related: Guide: How to Ask for a RaiseDeductions from gross pay
Your gross income is the total amount of money you receive annually from your monthly gross pay. Your gross annual income and gross monthly income will always be larger than your net income.
The reason your gross pay is always higher than your net pay is due to some mandatory and voluntary deductions from your employer and potentially due to choices you have made about savings or benefits.
Required deductions can include but are not limited to:
Your employer may make additional voluntary deductions from your paycheck for other reasons. These can include but are not limited to pension plans, equipment and uniforms necessary for your job, and union dues. These are voluntary in the sense that they are not federally mandated, but you may not have an option to opt out of them under your employment contract.
On your payslip, you may also see deductions for your health plan, 401k, health savings account, flexible savings account or other benefits if your employer offers these.
Deductions related to savings mean that the money is still yours but is being placed in an account you may only be able to access under certain circumstances or by paying a tax penalty. The amount of these deductions is typically something you personally determine when you are making benefit selections. Your company’s HR team may be able to answer any questions you have regarding these choices.How to calculate gross income
To calculate your gross income, refer to your most recent pay statement. How you calculate gross income will vary depending on whether you receive a salary or hourly wage.
The salary included on the contract you and your employer signed when you started will be your official gross pay. You may also be able to calculate gross income based on your regular pay statements. For example, if you receive $5,000.00 per month in gross pay from your employer, you can do a simple calculation ($5,000.00 x 12 months) to get your gross income: $60,000.00.
Related: How to Negotiate Salary
However, there’s a chance you could earn other income from your employer, including from bonuses. If you’ve received bonuses as well as your salary, you will need to include the full amount you received before taxes in bonuses when you calculate your gross salary amount.
It’s important to add the gross bonus amount to your gross salary because bonuses are often taxed at a different rate than regular income.
For example, if your employer agrees to pay you $60,000.00 per year without bonuses, that will be your gross income. However, if you receive a $5,000.00 bonus this year, it will be taxed at a 22% flat rate, while your regular salary will have either a lower or higher tax rate, depending on how you file your taxes. So your gross pay will be $65,000.00 including bonuses, but your net pay might be a bit more complicated to calculate.
If you earn hourly wages and you aren’t sure of how many hours you’ll work annually, it may be easiest to calculate your gross income at the end of the year. Once you receive your last pay statement, you will be able to locate the entire gross earnings you made during that year.
However, if you do receive regular and guaranteed hours from your employer, you can calculate your weekly, monthly or yearly gross income rather easily. Simply multiply the number of hours you receive each week by the total amount you earn in an hour.
For example, if you earn $18.00 per hour with a guaranteed 35 hours of work per week, you will have gross weekly wages of $630.00, gross monthly income of about $2,520.00 and gross annual pay of about $32,760.00 per year.
If your employer does not provide paid time off, remember that your gross pay will decline if you take any days off. If you receive a raise at any point in the year, adjust your calculation to account for the increase in hourly pay.