Gross pay versus net pay: Do you know the difference?
Learn the difference between gross pay and net pay and how that affects your budget.
You have received your first paycheck from a job – congratulations! However, your take-home money will be different than what you were told was your hourly rate. This is because there is a difference between your gross pay and your net pay. Knowing the difference is important in making a budget and planning how to use your money.
Gross pay is the total dollar amount you earn at your job. It is the income before any deductions and includes bonuses, commissions and tips. For instance, if you are paid $8 an hour and work 20 hours, your gross pay would be $160. If the job you work at includes tips or a commission and you earned $76 from tips or commissions on top of the $160 earned, your gross pay would be $160 + $76 = $236.
Net pay is the amount you take home after deductions and taxes are removed from your gross pay. These subtractions from your gross pay will include federal, state and local income taxes, if applicable. It will also include the Federal Insurance Contributions Act deductions known as FICA. FICA includes Social Security and Medicare contributions. Other subtractions to your gross pay will include any deductions for items such as health or dental insurance, retirement contributions, union or membership dues, charity donations or other deductions that might be a chosen or required component to the job. In the example provided above for the pay with tips or commission, deductions would be taken out of the $236 to generate the net pay.
Gross pay is the “great” or “grand” pay – the larger number. The best way to remember the difference between gross pay and net pay is that net pay is similar to a fishing net. You will not get all of the fish in the total pond, but will get a large sweep of them.
The gross pay and the net pay for your job or career are important to know, however, it is the net pay that will influence your spending and saving decisions. Understand the difference to be prepared for the financial decisions in your life. Once you know your net pay, you can calculate your budget.
Michigan State University Extension 4-H Youth Development has many resources to help youth with money management decisions and information. MiMoneyHealth also provides helpful tools to support a journey towards sound financial practices. The National Endowment for Financial Education High School Financial Planning Program is also a great resource to support high school aged youth in their quest for financial education.