While the differences between gross pay and net pay may be common knowledge to you and most of your workers, going back to basics can be helpful for understanding the regulations that govern the difference between take-home pay and pay rate.
Learning about these complementary regulations can help prevent complications in business. Employers who comply with payroll laws regulating gross and net pay can better ensure company success as well as employee well-being. Let’s take a closer look at gross pay and net pay, and explore how Mosey can help simplify payroll compliance for your business.
What Are Gross Pay and Net Pay?
An employee’s take-home pay amounts to less than their salary because of the difference between gross and net pay.
Gross pay is an employee’s salary or hourly wage. When both companies and workers agree upon a pay rate upon employment, they typically speak about gross pay — the earnings an employee receives for their labor or contributions during a given pay period.
An employee who receives $60,000, for example, can expect a gross pay of $2,500 per pay stub if they are paid twice a month.
Taylor Fike, Partner at Fike Advisors, notes that this number is most important for the employer to know since this is going to be the obligation for the company financially to provide to keep the employee on staff.
Net pay is what employees earn after taxes and deductions are taken out of their gross pay. Taxes and deductions are typically taken out every time an employee gets paid. Because taxes and deductions can vary, it’s difficult to make overarching estimates of any given employee’s net income.
Fike also notes that while net pay is much “less flashy” than gross pay, it is a very important number for an employee to know. Net pay is the amount employees should use for their personal budgeting, not their gross pay.
What Factors Affect Gross and Net Pay?
Gross pay can vary based on company, job type, and employee experience. Net pay, on the other hand, is directly impacted by the amount of taxes and deductions an employee is subject to.
Federal and State Taxes
Federal taxes are deducted to fund nationwide programs and services. Federal income tax rates depend on income thresholds, so the more money an employee earns, the more federal taxes they may expect to pay.
State taxes are paid to the state in which business is conducted and are used to fund programs and services specific to that state. Because every state has its own laws, state tax rates vary. For example, North Carolina applies a flat rate to all workers regardless of annual gross income, with 2023’s rate being 4.75%.
Employees may also be subject to local income taxes alongside federal and state taxes. Local taxes are used to fund services in municipalities within certain states. For example, residents of New York City are required to pay local taxes to the city as well as to the state and federal governments.
Your business operations may cross tax jurisdictions, creating crossover relationships sometimes referred to as a tax nexus. Because of these tax nexuses, you may be subject to several state and local payroll taxes, depending on whether your business operates across state lines, whether you employ remote workers who live in a different state from your headquarters, or whether you employ workers who live and work in different tax jurisdictions.
Staying up to date on local and regional tax laws is not easy — Mosey keeps everything you need to know in one place so you can stay compliant when it comes to taxes and payroll.
Employee Benefits and Deductions
Many companies offer their employees benefits alongside their salaries, such as healthcare insurance or retirement accounts. Employees who receive these benefits can expect additional payroll deductions — but benefit deductions differ from company to company and can vary based on the type of plan an employee is enrolled in.
Other Mandatory and Voluntary Deductions
While all employees need to pay federal, state, and local taxes, there are other types of mandatory deductions, too. These include FICA taxes (Social Security and Medicare taxes) and court-ordered deductions.
Court-ordered wage garnishments can include child support payments, unpaid taxes, student loan payments, or credit card debt collection. These are automatically taken out of an employee’s gross pay.
In some cases, employees can choose to opt into pre-tax deductions for other types of investment or savings plans provided by their employers. Voluntary deductions can be offered to employees by companies who choose to partake in their corresponding programs.
Why Is Understanding Gross vs. Net Pay Important?
Understanding gross and net pay can help employers maintain proper payroll practices.
Budgeting and Financial Planning
Budgeting and financial planning are important to both employers and employees. Employers should be able to sufficiently pay their workers and input the proper deductions in their payroll systems.
When accounting for gross and net pay, employers can better determine what they can offer employees based on their budgets and what employees will receive after deductions.
The result is that when employees are well-informed of how their net pay compares to their gross pay, they are better able to plan around the amount of money they receive from every paycheck. They may also be less likely to be unsatisfied with their pay — and more likely to feel fulfilled within their roles.
Compliance for Employers
To protect their companies as well as their employees, employers must ensure business compliance with payroll and tax laws. Employers must pay the right taxes on behalf of their workers and correctly determine the taxes to be deducted from paychecks in accordance with state and federal regulations.
Proper business compliance can also include efficient record-keeping, licensing, and administrative benefits. With Mosey, you can streamline and simplify compliance, all in one place. From payroll to registration, HR, and tax compliance, Mosey makes it simple to stay organized, even automating compliance tasks along the way.
Informed Discussions and Negotiations
Transparency on gross and net pay allows employers and employees to manage salary expectations. In fact, some salary transparency laws require employers to make salary or wage information public. These laws vary by location and depend on the company’s number of employees.
Employers must ensure that employees are aware of their gross salary or pay rate. This way, hourly employees are aware of the number of hours they will work per week and calculate their hourly rate. The total amount of their gross income will depend on overtime pay as well. On the other hand, salaried employees need to know the number of pay periods per year to calculate gross pay as well as the expected payroll deductions.
Mandatory deductions, like state income tax, are non-negotiable. Other types of deductions — such as savings accounts, retirement contributions, or health insurance premiums — should be openly discussed between employers and employees before and after hiring.
How To Manage Compliance Challenges Related to Gross vs. Net Pay
While determining net pay from gross pay may seem simple enough, companies may face a few challenges in ensuring employees’ net pay is sent to their bank accounts every pay period.
Navigating State-Specific Payroll Regulations With Mosey
Payroll regulations often change. To maintain proper compliance, it’s highly important to stay up-to-date with legal developments and make sure they are reflected in your business practices.
Mosey helps ensure that all types of business owners remain informed of and compliant with state and local payroll laws. Mosey can help you determine what regulations apply to you based on the states you have employees in, as well as whether you are subject to any local taxes. It even monitors upcoming legislation to alert you of new policies that may impact your business and when those will become active.
Not complying with local laws can cost your company in penalties. Automating compliance with Mosey simplifies your business processes.
Regularly Updating Payroll Systems
Even the most advanced payroll systems can be subject to error, which can prove detrimental to your company or employee satisfaction.
If your company handles payroll manually, consider using payroll software as your company grows. This can help you better organize information needed for running payroll, more efficiently classify employees, and find appropriate deductions.
Understanding the Impact of Misclassifying Employees
Not all employees are subject to the same payroll deductions. Because deductions impact net pay, exercising caution when managing different payrolls is important.
For example, because tax rates depend on income thresholds, you must ensure that employees are getting the proper amount withheld from their gross wages. Additionally, not all employees are enrolled in benefit packages, so they won’t be subject to healthcare or retirement plan deductions.
Other hourly workers, such as contractors, may not be subject to withholdings at all. Misclassifying employees can cost your company in compensation to employees who are accidentally underpaid or may even result in legal consequences.
Ensuring Proper Withholding and Timely Payments
During the hiring process, employees fill out IRS Form W-4, in which they declare the amount of taxes they want withheld or deducted from their pay.
Based on their filing status, employees can determine the amount of taxes to be taken out of their paychecks and paid on their behalf by their employer. This can impact whether or not they owe taxes when they file their tax returns.
Employers should be able to assist employees in filling out their W-4s. They are also obligated to withhold the correct amount of taxes as reflected in the employee’s form.
Gross earnings and net pay should also properly reflect an employee’s pay schedule. For example, if an employee is paid biweekly, their annual salary should be divided by 26 to determine their biweekly gross pay. From there, net pay can be calculated based on taxes and deductions.
Streamline Payroll Compliance With Mosey
The key differences between gross and net pay can be jarring to employees and tricky to navigate for employers. Understanding them keeps you transparent with workers and ensures compliance with payroll regulations.
For companies that employ people across the country, compliance can become especially complicated. Mosey helps you adhere to differing tax and payroll regulations across states, automating much of your payroll processes. Schedule a demo today to see how Mosey can make payroll compliance a breeze.
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