Net pay is also known as take-home pay which is the total amount of compensation after all the deductions from the gross pay. It’s the amount paid to an employee on each payday.
Some deductions are voluntary while others are mandatory, such as the Federal Insurance Contributions Act’s (FICA) mandatory Social Security Tax, Medicare Tax, State Income Tax Holdings, and Wage Garnishments. Voluntary deductions are more of a benefit for the individual, such as health, vision, and dental insurance, life insurance, and retirement fund.
Employees receive an itemized breakdown of all the deductions from their income in the form of a record or receipt along with their salary on payday.
Employees can also easily find net pay by subtracting the deductions from the gross income.
Calculation of Net Pay
Employees or HR specialists commonly follow four basic steps for calculating net pay.
Total worked hours multiplied by the hourly pay rate or division of gross pay by the number of pay periods.
Withholdings of all the taxes, including employee FICA taxes, federal, state, and local.
Deduction of health insurance, retirement plan contributions, and employee benefits.
