Net pay is the amount of money an employee takes home after all deductions and withholdings are subtracted from their gross pay (total earnings before deductions). It is also called take-home pay or net income
. Deductions that reduce gross pay to net pay include:
- Mandatory taxes such as federal and state income tax, Social Security, and Medicare (FICA taxes)
- Court-ordered wage garnishments (e.g., child support)
- Voluntary deductions like health insurance premiums, retirement contributions (401(k), pension), union dues, charitable donations, and other benefits
Net pay is the actual amount deposited into an employee’s bank account and is crucial for budgeting and financial planning since it reflects the real money available to spend
. In summary:
Net Pay=Gross Pay−Total Deductions\text{Net Pay}=\text{Gross Pay}-\text{Total Deductions}Net Pay=Gross Pay−Total Deductions
where total deductions include all mandatory and voluntary withholdings
