Terms like gross pay and net pay are often confusing for a new employee. After graduation, when you land a job, you get your paycheck with one bold number net pay, and another number on check is related to gross pay. These numbers confused you because gross revenue is higher than net pay as you don't know the difference between both. 

The practical world requires you to get familiar with a variety of concepts. So, today you need to learn :

Main Difference between Gross Pay and Net Pay

Gross pay is money you earn from a job before tax and deductions. 

Net pay is money available for you to use from a job after-tax and deduction.

I know it's still confusing, so let's take some examples that would help you better understand what gross or net pay is.

Monthly Salary Example

According to your contract with an employer, you decided on an annual salary of $60,000. Divide this salary by 12 months, and your monthly salary is $5000- which is your gross pay. 

Now, if you need to pay taxes and insurance deduction of $500, then after deductions, your net pay per month becomes $4500.

As a salaried employee, you also earn income in the form of bonuses. You need to add these bonuses in the calculator of your gross pay. The tax rate on bonuses is different from monthly salaries; you need to check the rate. It's better to get help from an HR manager to clarify your bonus and its applicable tax rate.

Hourly Salary Examples

If your employer decided to pay you $20 per hour for 40 hours in a week, multiply 40x20, and it becomes $800 per week and $3200 per month salary- your gross monthly pay.

There are some taxes from the government alongside your pension fee of around $200. After this deduction, your net monthly pay becomes $3000.

Know: What is Meant by Competitive Salary?

Understand Deductions from Salary

You may be wondering that gross pay is higher than net pay. Your gross pay includes taxes, fees, and savings for your future. It includes Federal and provincial income, payroll taxes, Employment Insurance, Health Insurance, and Canada Pension Plan.

All these expenses need to be deducted from your salary. After deduction, you will get net pay. Employers used to remove some other voluntary fees from your gross income. These fees are included but are not limited to uniform fees, safety fees, equipment cost, pension plans, union dues, etc. 

Employers offer various benefits to their employees, such as health saving accounts, flexible savings, CPP, health plans, etc. Every month deduct some fees for all these benefits provisions. 

Some deductions are voluntary, while others are involuntary. What kinds of deductions you will face depends completely on the industry you are working in.

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If your employers offer you payment or perk such as discounted gym fee, public transit, parking, etc., this amount will also be deducted from your gross pay. When you make benefits selection, the HR department clears your monthly deduction and what you can avail yourself of.

If your employer doesn't pay you for your off-day, then every holiday fee will also be deducted from your gross pay.

How to Calculate Gross Income?

You can use an online gross income calculator and add details like your pay cycle and hourly/monthly rate. What is your pay cycle? If you are a salaried person, you are being paid every month. Are you working on an hourly rate? In that case, you might get paid bi-weekly, weekly, or daily. People on wage can calculate their gross pay by multiplying the hourly rate in numbers of hours per week and then multiply this amount by four. 

Why is it Important to know the difference between Net and Gross Pay?

It's your money, and you should know where it is going. Gross pay is what you earn, but net income is what is available for you to spend.

You have living expenses and a savings plan. You can't make future money plans without getting an exact budget figure. Thereby, you need to know the main difference between gross and net pay.

Must Read About Workplace Ethics 

Sometimes, you don't want some benefits from your employer, but he is deducting money from your gross pay. After checking your gross and net pay difference, you can easily take that matter to HR. You can ask them to stop giving you some benefits. In that way, you can increase your net pay and have more money for your monthly home budget.

Suppose you hire anyone for your home service. Let's suppose you hire a home aid and pay her $500 per week. Now you will become an employer, and she is your employee. As an employer, you have some financial responsibilities. It would help if you deducted income tax, EI, and CPP premiums from this gross pay of $20,000/month. After deduction of this amount, you will remit it to Canada Revenue Agency (CRA) each month.

Conclusion

Gross pay is the complete pay you earn, while Net pay is the income you have available to spend after deduction of taxes, fees, premiums, and other deductions. It would be best to have a complete idea about both concepts as you make efforts every day to earn money. So, once you have it, you should know where you are spending and why your employer is deducting fees from it.