Gross-to-net (GTN) is a payroll management process that calculates an employee’s net pay by subtracting certain reductions and deductions from an employee’s gross pay.
Gross salary describes the amount of money an employee earns before any reductions or deductions are made. Net pay is the amount an employee takes home after subtracting reductions or deductions from their annual salary.
Also known as GTN, gross-to-net is a process that calculates the total amount of take-home pay after taxes and deductions are removed from the contracted annual income.
Reductions and deductions include mandatory deductions as per local laws. In the US, this includes Federal Insurance Contributions Act taxes (FICA taxes) and taxable income, as well as optional deductions, such as retirement contributions.
Why does gross to net matter?
Gross-to-net calculations are important for employers as they ensure employees are paid accurately, with the correct amount of deductions and taxes being withheld from their paychecks. The process ensures compliance with state and federal regulations, reducing the risk of penalties and fines for noncompliance.
The process also helps with budgeting and financial planning, ensuring that human resources and the financial team make insightful financial decisions.
Gross-to-net is also important for employees. By determining how much money is withheld from their paychecks for various taxes and deductions, they can budget their income effectively. The process ensures employees are paid fairly and that their paychecks are free from errors or discrepancies. In turn, this contributes to a positive work environment.
Examples of gross-to-net deductions
The exact gross-to-net deductions differ by company and location, depending on the optional deductions included in the company policy and required by local laws. The most common gross-to-net deductions in the US are as follows:
Federal Income Tax
The amount of federal income tax withheld depends on several factors, such as the employee’s income level, which affects tax brackets, filing status, and the number of dependents. Employers are responsible for withholding federal income tax on behalf of their employees and paying the amounts to the IRS.
Calculating the correct federal income tax rate is important to maintain compliance with federal tax regulations, ensuring employees avoid underpayment or overpayment of taxes.
State Income Tax
The amount withheld for state income tax varies based on where the employee works. Like federal income tax, state income tax is based on the employee’s income level, which impacts their tax rate, filing status, and the number of dependents.
FICA (Social Security and Medicare)
FICA, which includes social security and medicare taxes, is deducted from an employee’s gross wages when calculating net income. Social Security tax funds retirement, disability, and survivor benefits for eligible employees. Medicare tax funds healthcare for those over the age of 65 and certain individuals living with disabilities. Employers are responsible for withholding and paying FICA taxes on behalf of employees.
Health insurance premiums
Health insurance premiums are common voluntary deductions taken from an employee’s gross income to cover the cost of their health insurance plan. One of several pre-tax deductions, the premium amount varies based on the specific health insurance plan and the level of coverage the employee selects.
Deducting health insurance premiums from an employee’s paycheck helps ensure the plan’s cost is covered and the employee has access to necessary healthcare services.
Retirement contributions fund an employer’s retirement savings plan, such as a 401(k) or IRA. The exact calculations may differ depending on the company policy. In most instances, an employee elects to contribute a percentage of their gross pay to the retirement plan, and the employer matches the contribution.
Union dues fund the activities and expenses of the union, including negotiating contracts, advocating for worker rights, and providing education and training to members. The amount varies based on the union and collective bargaining agreement.
Wage garnishments are taken from an employee’s gross pay when a court or government agency orders a portion of the employee’s wages to be withheld to pay off a debt or judgment. Common wage garnishments include child support, back taxes, or student loans.
How do you calculate gross to net?
Calculating gross-to-net follows a simple formula that can become complicated depending on the deductions involved. Essentially, all deductions and taxes are subtracted from an employee’s gross pay to equal the net amount that an employee earns.
Consider that a salaried employee, who is the head of household, earns a gross pay of $2,500 USD bi-weekly, with $400 deducted for federal income tax, $100 for local taxes, $150 for FICA tax, and $50 for health insurance premiums. These deductions total $700.
To calculate the employee’s salary post taxes, employers subtract $700 from $2,500. The final net pay is $1,800.
Whether you manage payroll for a big or small business, correctly determining the details of each employee’s gross vs. net income is important. Deel’s take-home pay calculator helps new hires understand the salary they’ll take home after taxes and helps employers make informed, competitive global offers.