Anyone who works as a regular employee receives a paycheck or a pay statement at regular intervals that states gross wages, deductions and net earnings. The factors that determine the difference between gross pay and net pay vary according to the individual wage earner. Depending on particular circumstances, the difference between gross pay and net pay can be quite large.
When job listings post a salary or salary range, that figure refers to gross wages. Gross wages are comprised of employee compensation for work performed in the course of the regular duties of a job or assignment. Gross wages are the total for regular salary or hourly wages, overtime pay, commissions and bonuses earned. Gross wages refer to the amount of earned income before any deductions for federal and state income taxes, Social Security or Medicare. Gross wages also do not show deductions for health insurance or similar deductions.
Net pay is the amount of earned wages that workers actually take home each pay period. Take home pay accounts for mandatory federal and state deductions, as well as elective deductions pertaining to specific employees, such as employer-managed 401(k) programs or union dues. However, deductions that employees arrange on their own, like those that automatically divert part of a direct deposit paycheck from the receiving account into a separate savings account, do not count in the calculation of net pay for tax or accounting purposes.
Gross Pay Versus Gross Adjusted Income
Gross pay also differs from gross adjusted income, which is a calculation that relates to filing and paying federal income taxes. Gross pay refers only to wages, while gross adjusted income includes additions and subtractions from various sources, including earned income. Taxpayers calculate their gross adjusted income by adding earned wages and taxable income from all sources, including dividends and lottery winnings, then subtracting items such as contributions to an Individual Retirement Account, student loan interest payments and health insurance premiums.
Gross Pay, Independent Contractors and Unemployment Insurance
Whether they receive flat-fee payments or hourly wages, independent contractors do not have deductions for taxes or employer-provided benefits taken from payment or compensation they receive from companies or other clients. The pay independent contractors receive for their services is comparable to gross pay for regular employees. In addition, no deductions are taken for unemployment insurance compensation payments unless the recipient files "Form W-4V, Voluntary Withholding Request," with the Internal Revenue Service.