Net salary or net pay is a word that crops up repeatedly within employment. If you’re new to the world of employment, it may leave you confused. However, because it concerns your payment, it’s important you understand what net salary is and how to calculate it so that you won’t be hit with any surprises later.
The last thing you want to do is begin planning how you’ll spend your salary to then be left with much less than what you had expected.
So what is a net salary?
Net salary is the total pay you receive once taxes and deductions have been paid.
Usually, the employer or business will take care of the deductions before sending the employee the total amount (or net pay) direct to their bank account. Most companies or employers will have payroll software that calculates total wages before they’re sent out.
So if your employer sends you $3000 at the end of the month, that is your net monthly salary after everything has been taken out of your paycheck and your net and gross salary are different.
It is important to note that net pay and net salary are often used interchangeably.
How do I calculate my net salary?
To calculate your net salary, you will need to know your gross salary. This is the total payment you will have agreed upon in an employment contract before starting a new job or contract. For example, a job listing may state that the salary would be $100,000 yearly; that value is the gross pay. If you also receive extra overtime pay or performance bonuses, this is also included in the total figure. The $100,000 would then be the basic salary, and then any additional earnings would be included to provide a figure for yearly gross income.
However, to calculate gross monthly income then, you will follow a different process:
If you receive an hourly wage, it will be the hourly rate multiplied by the number of hours worked. An example would be $15 per hour multiplied by 40 hours worked.
For salaried employees, you would divide the annual gross pay by the total pay period; you would calculate this as $1000,000 divided by 12 pay periods.
Calculate deductions
Next, you need to calculate your deductions. Again, this can vary depending on personal situation. These deductions are mandatory, like taxes, and some are optional. After subtracting the deductions from gross income. the value you are left with is your net pay.
Some of the common taxes and deduction types are:
- Federal income tax /Social Security taxes/Fica taxes
- Retirement contributions and investments or 401(k)
- Health insurance premium
- Medicare taxes
- State/local income tax
As you may be aware, tax is calculated using a percentage rather than a fixed amount. So if you work overtime, then you may pay more taxes in that pay period. Also, taxes may be charged at a different rate depending on which state you are employed in.
This figure for net pay is often also found at the bottom of a pay slip. It is usually marked as your net salary to avoid confusion.
Is net salary yearly or monthly?
Net salary is commonly described as how much money you are left with once deductions have been taken. However, it is more commonly used to understand how much money you receive on a monthly basis.
What is a net monthly salary?
Net monthly salary is the amount of take-home pay that an individual receives on a monthly pay period. This is a helpful figure to know as it can help budget if you are paid monthly, and if there are issues with underpayment, you’ll be likely to know.
Example of working out a net monthly salary
Fred lives in New York; he has just secured a new job and has been promised $95,000 as his gross annual salary. Fred needs to work out how much money he’ll have left for rent, bills, and other expenses on a monthly basis. Fred understands his monthly gross salary will be $7,917. He works out his mandatory deductions and contributions and calculates the total at $2,194. After the deductions are subtracted from the gross monthly salary, Fred is left with $5,723. This is his net monthly salary.
What is a net annual salary?
Net annual salary is the total amount of take-home pay you will receive over a financial year. This will take into account any other forms of income which will be included. So if you have worked two jobs and received different amounts of gross salary from each one, you would calculate gross pay from both and then remove taxes and deductions. The remaining figure is your net annual salary.
Example of working out a net annual salary
Fred lives in New York; he earns $60,000 from his main job, and he also makes an additional $15,000 from a part-time weekend job. Fred pays $13,760 in taxes from his first job, and from his second job, he pays $1,764. So in total, Fred benefits from a gross annual salary of $75,000, but after deductions, his net salary is actually $59,476.
Bottom Line
Net salary is an important figure. However, knowing exactly how much you’re left with after taxes and deductions can be beneficial. This can help not only with better budgeting and saving but also with forecasting. You may even identify issues with your total pay as you may be missing out on opportunities for non-taxable investments.
Make sure you’re able to calculate your net salary to ensure you stay well aware of your financial situation.
We hope you enjoyed this article and were able to get a better understanding of what net pay is and how it affects you. If you are looking for a new career or just want to know how much you could be making, then make sure you check out our salary comparisons and compensation information.