The first time you looked at a paycheck, you may have seen a large number and been very happy, only to have your excitement dimmed when you cash the check for a much smaller amount.
That is because gross pay and net pay refer to two different accounting concepts. They each describe income, but only one takes operating costs and other expenses into account.
You might be asking yourself why accountants need two different ways to describe income in the first place. Even though you might only care about the amount of money you actually take home, federal and state governments (and creditors and bankers) are usually more concerned with the amount of money your company actually pays you.
If you aren’t sure whether the number you are looking at represents net or gross pay, continue reading to learn more.
What is the Difference Between Gross and Net?
In this post, I will compare gross vs. net. I will use each of these words in at least one example sentence, so you can see them in context.
Plus, I will show you a helpful memory tool that you can use as a reminder of the most appropriate word.
When to Use Gross
What does gross income mean? Gross has several meanings, but, in this article, I will focus on its use as an adjective that describes the sum total of something before expenses.
You will often see a line marked gross earnings on your paycheck or on a company’s quarterly financial statement.
In these instances, gross denotes all of your (or the company’s) income before deducting operating costs, taxes, or other expenses.
- My gross pay this period was embarrassingly low, but I will be taxed on it anyway.
- Many oil companies have reported lower than average gross income during the crude surplus.
- Freight broker Echo Global Logistics fell to a $2.9 million loss as rising transport costs offset a 2.6% gain in gross revenue. –The Wall Street Journal
When to Use Net
What does income mean? Like gross income, net income can mean several things. The relevant usage for this article is the actual total of something, after all expenses, taxes, and other deductions have been taken into account.
On a paycheck, the net income should always be lower than the gross income.
Here are a few sentences that demonstrate what I mean,
- Even though my gross pay was $1,600 this period, my net pay was only $1,120 after taxes, my 401k contributions, and health insurance.
- Net earnings this quarter were $1.10 per share, up from $.96 per share a year ago.
- Net income dropped 15.3 percent to 1.8 billion euros ($2 billion) from 2.1 billion euros a year earlier, as gains from the sale of financial stakes weren’t repeated. –Bloomberg
Trick to Remember the Difference
Both gross and net refer to the income of an individual or a company, but each term refers to income at a different point of accounting analysis.
- Gross describes the total before expenses, taxes, and deductions.
- Net describes the total after all expenses, taxes, and deductions have been taken into account.
On a paycheck, the net pay will be your “take home” pay.
Since net and take home both contain the letter T, you can use this phrase to remember the meaning of the word net in financial contexts.
Is it gross or net? Both net and gross are ways to describe a person’s or company’s income.
- Gross describes the total before deductions and taxes.
- Net describes the total after the deductions and taxes.