What is Net Pay?

What is Net Pay?

Definition

Net pay is the amount of pay that an employee receives after all deductions have been made. It is the amount that is arrived at after making deductions from the gross pay. Net pay is also referred to as take-home pay.

What does net pay mean?

The net pay is the sum that an employee will actually receive at the end of a pay period. It would be less than the gross pay because of the deductions and the amounts that are held back.

Net pay = Gross pay – Payroll taxes – Other deductions

What are the different amounts that are deducted from an individual’s gross salary? This is an illustrative list:
⇨ Medicare and Social Security taxes.

⇨ Deductions for medical insurance, life insurance, and dental insurance.

⇨ Repayment of an advance that the employee has taken from the company.

⇨ Deduction towards a 401 (k) plan.

⇨ Deduction for trade union dues.

⇨ Voluntary deduction towards a charitable cause.

The pay stub will provide complete details about the gross pay as well as the deductions that have been made. This will allow the employee to verify that the net pay has been correctly calculated.

Example of net pay

Steven Prose is employed by Green Brothers, a trucking company. He is paid a gross salary of $52,000. Steven receives 26 paychecks a year.

When Steven receives his first paycheck for the year, he sees that his net pay is only $1,750. His paystub tells him that deductions totaling $250 have been made by his employer. The deductions are towards Medicare, Social Security, and an advance that he had taken in the previous month.

Summary

The net pay that an employee receives is usually less than the gross pay. It is important for an employee to read the paycheck stub carefully and verify that the deductions have been correctly made.