Whether you work a job where you are paid hourly or through an annual salary, how much you earn can be described as either net or gross pay. Understanding the difference between net pay and gross pay can help you gain better insights into your own personal finances. It can also help you make informed decisions when accepting or declining a job.
The good news is that understanding the difference between your gross income and your net income is simple. In this guide, we’ll walk you through everything you need to know about gross pay, including key tips for calculating your annual and monthly gross income.
What is gross wage?
When you receive a paycheck, you’ll be receiving compensation for the work you have performed. In some cases, you’ll be paid an hourly wage. For hourly employees, wages are only earned for hours worked. In other situations, you might be paid an annual salary. Salaried employees are paid based on predetermined requirements. An annual salary is broken down into payment segments, often bi-monthly.
However, when you receive your paycheck, you’ll only receive a portion of those wages. The total amount of money you earn before anything is deducted is called your gross wage. Simply put, gross wage is the total income you earn prior to any taxes or deductions being taken out of your pay.
When you receive a job offer, if the company is offering you a salaried position, they will tell you your annual gross income. In the case of an hourly position, they will offer you a gross wage.
Gross pay vs. net pay
For many, it is easy to remember how shocking your first paycheck was. You knew you were supposed to earn a specific dollar amount per hour, but when you received your check, it was less than you expected.
This is due to the difference between gross pay and net pay. Gross pay is the highest amount you’ll see on a pay statement. This is the amount of money that a company is paying you prior to any deductions or taxes. For example, if you are an hourly employee, and your employer is paying you $25 an hour and you worked 80 hours during a pay period, your gross pay would be $2,000.
However, the amount you actually receive by way of a paycheck or deposit into your bank account reflects your pay after deductions and taxes. This is referred to as your net pay or your net income. Your net pay might be significantly lower than your gross pay, depending on what money is deducted from your paycheck.
Money withheld from your paycheck includes both required and optional deductions. Required deductions include federal, state, and local income taxes. This also includes social security and Medicare taxes.
Optional deductions vary based on the organization for which you work but often include health plans, health savings accounts, and 401k deductions. During the onboarding process, you’ll usually have the opportunity to determine what money you want to be deducted for each of these categories.
How to calculate monthly gross income
If you want to know how to calculate gross monthly income, you’ll need to start by gathering information from all sources of income. For many, this will be a single source—the company for which you work. However, if you also earn money from investments or rentals, you will want to include this information as well.
In order to determine your monthly gross income, it is important to find the numbers that showcase the income you are earning prior to any deductions. In the case of a business, you can request your paystub from HR or access it through an online portal.
If you are an hourly employee, you can calculate your monthly gross income by multiplying the number of hours you work each month by the agreed-upon hourly pay rate. Keep in mind that as an annual employee, you will only be paid when you work. If you don’t have any paid vacation time, your gross pay will go down during the weeks you take time off.
For salary employees, you can calculate your gross monthly income by dividing your annual salary by 12.
Why is gross pay important?
Understanding your gross annual income is important for a few reasons. For starters, when you are in the process of applying for a new job, your job offer will include a gross pay offer. This is important to keep in mind when deciding whether or not an offer is high enough.
For example, if you have determined that you need to earn at least $65,000 annually in order to meet your personal budget requirements, you won’t want to accept a salary offer of $65,000. Because this is a gross pay offer, you’ll actually be earning less than the $65,000 you need.
Understanding gross pay versus net pay can help you make informed decisions when countering job offers. It can also help you leverage for a better offer. Seeing that you will need to calculate deductions, you can counter an offer with a requested salary that better meets your budgetary needs.
Additionally, your gross annual income can be an important number to understand when applying for a loan.
Most mortgage lenders and other financial institutions will require information about your gross pay to determine whether or not you are eligible for financing. It will also be beneficial for you to think through what loan payments you can afford based on your actual take-home or net pay.