Gross-to-net (GTN) is a payroll process that determines the total amount of an employee’s take-home pay after removing taxes and deductions from their gross income.
In the United States, mandatory reductions and deductions include Federal Insurance Contributions Act taxes (FICA taxes), unemployment taxes, taxable income, and any optional deductions, such as retirement contributions.
What are the differences between gross and net?
Gross pay is what an employee earns before an employer withholds appropriate deductions from their wages, while net pay is what an employee earns after all appropriate withholdings are removed from their gross pay.
What is gross pay?
Gross pay includes the employee's earned wages before all payroll tax withholdings. A typical paycheck includes a breakdown of the employee’s regular gross income, bonus pay, and reimbursements before any deductions.
Is gross income before or after taxes?
Gross income is an employee’s total earnings before taxes and other deductions.
What is net pay?
Net pay is the amount an employee takes home after the employer withholds payroll tax from their gross wages. In addition to the employee’s regular gross income breakdown, their paycheck typically shows the calculated payroll deductions that result in their net income or take-home pay.
Importance of calculating gross to net
Gross-to-net calculations are critical to maintaining payroll compliance with international, national, and regional regulations.
For employers that pay remote international employees, calculating gross-to-net pay ensures they provide compliant payments to their employees according to local market regulations.
Gross-to-net also helps employers implement a global compensation strategy that attracts and retains talent and aligns with their budget. Gross-to-net enables employers to more easily determine total employee cost and forecast financial needs to make insightful decisions for the future.
Additionally, gross-to-net ensures employers pay their employees fairly and accurately. Employees can easily see an itemized list of withholdings in their paychecks to understand their take-home pay and budget accordingly.
Examples of gross-to-net deductions
Gross-to-net deductions vary by country and also depend on a company’s optional deductions policy. In the United States, examples of gross-to-net deductions include the following:
- Federal and state income taxes. Employers must withhold federal and state employee income taxes on behalf of their employees. These withholdings depend on the employee’s location, income, tax bracket, filing status, and number of dependents.
- Social Security and Medicare (FICA). Employers are responsible for withholding Social Security and Medicare taxes from an employee’s gross wages. Social Security taxes fund an employee’s retirement, disability, and survivor benefits, and Medicare taxes fund healthcare for employees over age 65 or with certain disabilities.
- Medical, dental, and vision premiums. Employees can voluntarily make additional deductions to cover supplemental health insurance and vision and dental premiums. These withholdings depend on the employer’s provided health insurance plans and the employee’s level of coverage.
- Retirement contributions. Retirement contributions fund an employee’s retirement savings plan provided by the employer, such as a 401(k) or IRA. Typically, an employee elects to contribute a percentage of their gross pay, and the employer matches the contribution to the retirement plan up to a certain percentage.
- Wage garnishments. A court or government agency may withhold a portion of the employee’s wages to pay off a debt or judgment, such as for child support, back taxes, or student loans.
- Deductions for charities. Many employees choose to donate to a charitable organization through a payroll deduction. However, charitable contributions are taken out after taxes, and employees claim them as deductible when they file their personal taxes at the end of the year.
How to calculate gross income
To calculate an employee’s gross annual income, multiply their gross pay by the number of pay periods in a year. For example, if an employee makes $5,000 per paycheck and is paid monthly (12 paychecks), their gross income is $60,000.
For hourly workers, multiply their hourly rate by the hours worked during a pay period, then multiply by the number of pay periods in a year. For example, an employee with a rate of $20 an hour who works 30 hours during a one-week pay period has a gross weekly pay of $600. Multiply $600 by 52 weeks in a year, and their gross annual income is $31,200.
How to calculate gross-to-net income
Calculating gross-to-net income depends on the total deductions and taxes, which vary based on local regulations and optional withholdings based on employer policies.
In general, subtract all appropriate payroll taxes and deductions from an employee’s gross pay to get their net pay. Then, multiply their net pay by the number of pay periods in a year to total their annual gross-to-net income.
Consider the salaried employee from the above example who earns a gross pay of $5,000 per monthly paycheck. Federal income tax, local taxes, FICA taxes, and health insurance premiums total $900 in deductions per pay period. To calculate their gross-to-net income:
$5,000 gross pay - $900 deductions = $4,100 net pay
$4,100 net pay x 12 pay periods = $49,200 net income
Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information—and your interpretation of it—is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is" and Velocity Global makes no representations or warranties concerning this information.
