What Is Net Pay

The take home salary that an employee gets after deductions from his or her gross salary is referred to as net pay. These deductions may be voluntary contributions like pension fund contributions, tax deductions etc. The company must consider gross pay and net pay equally for budgeting purposes. The employees can know their net pay and deductions from the salary slip they receive along with their paycheck.

The employee must be made aware prior to the job offer about the various deductions from their gross salary. The main deductions are as follows:

  • Employee contribution towards medical insurance
  • Employee contribution towards pension fund
  • Deductions towards any stock option program
  • Social security taxes
  • Deduction under 401k plan
  • Deduction towards any educational loan taken for self or children

These major deductions are calculated as per the basic salary of each employee and then they arrive at the net pay. The employees should be made aware of compulsory deductions from their gross per as per government orders, these include social security taxes, taxes that exceed the tax slab for any salaried employee etc. In case of voluntary deductions the employee must be aware that contribution towards any pension fund , health insurance fund, the employer also makes equal contribution towards same, hence even the employer contribution towards it will also be deducted from the gross salary.

Another important factor that can have an impact on the net pay is trimmings. One technique that is used to recover money from an employee who has not paid them is wage trimming. The tax authorities may use this method to collect unpaid taxes. In order to use this method the employer must give the employee a legal notice as to what they would do to recover the unpaid taxes to calculate their net pay since it has to reflect in the earnings statement.

Because of all these deductions an employee’s net pay differs from appreciably from their gross pay. Every employee before looking at accepting an offer or is looking for change or promotion should know what their net pay is rather than gross salary. In the same way an employer must also consider the real cost of having the employee on board and also their contribution towards the employee’s health insurance, retirement plans, vacation days, paid leave etc.

Hence it is wise for every employee to discuss clearly at the time of accepting an offer the difference between gross pay and net pay. One more important factor to be understood clearly is the voluntary deductions and compulsory deduction that makes up the net pay finally. If a candidate is selected from the consultant agencies he or she should ask them clearly as to the composition of gross salary and its deductions.