How to Calculate Your Net Pay

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It’s never too early to get a start on your taxes, and part of that is calculating your net pay. It may seem straightforward enough, but without pay stubs, it can get complicated.

Net pay and gross pay are two common financial terms that distinguish between different ways to calculate salary. These amounts are especially important when determining what percentage of your earnings goes towards social programs like Social Security. It never hurts to double-check the numbers yourself.

To find out how to calculate your net pay, check out the guide below.

Net Pay vs. Gross Pay

Two financial terms that are not interchangeable, but very common, are net pay and gross pay. Remembering the difference between them is crucial for correctly calculating net pay, deductions, and other tax information.

Simply put, gross pay is the amount of salary a person earns before any deductions are taken out. Unfortunately, this amount is often used to calculate deductions, despite the fact that it is not the amount you end up with.

Net pay is the amount you take home after deductions. It is less than the gross pay amount.

Types of Deductions

Gross pay goes through a few deductions before it becomes net pay. These deductions may include social security, a 401(k) retirement plan, federal taxes, state taxes, income taxes, Medicare, and any other mandatory or voluntary items.

Local income taxes and state taxes may or may not be applicable where you live and work, meanwhile, items like social security, medicare, and federal taxes are not. Other items, like retirement plans, are entirely optional.

Steps to Calculate Net Pay

Calculating your net pay requires you to start with your gross pay. Follow these steps:

  1. Figure out the amount you are paid before deductions by looking at a pay stub, reviewing bank statements, or asking your employer
  2. Determine your deductions by using the IRS website for standard deductions and subtracting the exemptions you indicated on your W-4 when you first started the job
  3. Calculate net pay by subtracting the total amount of deductions from the gross pay

When calculating, make sure the gross pay and deductions are for the same period. You can use online software to create paystubs if it makes this process easier.

When to Use Net Pay

Net pay is important when applying for loans. Many lenders would rather see net pay because it is the actual amount of disposable income available to the applicant.

The process of calculating net pay also makes you aware of potential additional tax dues, like for those individuals who claim more exemptions.

More Business Guides

Without a pay stub neatly summarizing your income, you have to calculate your own net pay. Of course, some cautious employees may want to check their deductions themselves. This may help complete taxes later on, and make sure you won’t have any unexpected tax expenses.

For more business-related guides, make sure to check out our business section.

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