What is the key difference between gross pay and net pay?

The key distinction between gross pay and net pay lies in their definitions and calculations. Gross pay represents the total earnings of an employee before any deductions are applied. This includes all forms of compensation such as salary, hourly wages, bonuses, commissions, and overtime pay. Essentially, gross pay is the amount earned by the employee for their work before any taxes or other deductions, such as retirement contributions or health insurance premiums, are deducted.

In contrast, net pay refers to the amount that employees take home after all deductions have been subtracted from their gross pay. This is the actual income that an employee receives in their paycheck and is the figure that impacts their financial situation directly. It reflects the real earnings that individuals can use for spending, saving, or investing.

Understanding this difference is essential for anyone in payroll management or accounting, as it affects the calculations of taxes owed, contributions to benefits, and overall payroll processes.