Playing now

Playing now

What is net pay?

Glossary definition

What is net pay?

Net pay is an employee’s earnings after all deductions are taken out. Some deductions are obligatory, like PAYE and UIF. Other deductions come in the form of benefits, which may be optional. Medical aid or a retirement fund may be offered through an employer. These costs will come in the form of a deduction from the employee’s gross pay, or salary.

What is the difference between net pay and gross pay?

Gross pay is pay before deductions. Jobs advertising a R40,000 salary are referring to gross pay. It may consist of tips, bonuses, commissions, overtime, wages, and so on.

Net pay is pay after deductions. It’s what’s left over after taxes, medical aid, provident fund, and similar deductions have been accounted for.

How do you figure out your net pay?

Here is a formula to use to figure out your net pay:
Net Pay = Gross Pay – Taxes and Deductions

For employers, what does net pay mean?

A broader net pay definition includes implications for the employer, such as the obligation to match an employee’s retirement or medical contributions.

  • Only a portion of an employee’s costs are directly paid to the employee. Net pay refers to the amount an employee takes home, not the amount it costs to employ them.
  • Retirement plan contributions, employee benefits, and taxes are deducted before an employee receives their net pay.

For employees, what does net pay mean?

  • Net pay is take-home pay. Employees receiving gross pay of R50,000 may only take home R30,000 each month. It refers to income after accounting for retirement contributions, taxes, and so forth.
  • Two employees working identical positions may have identical gross pay, but significantly different net pay. Medical plans, commission structures, and similar circumstances can substantially impact take-home pay.
  • Gross pay is an accurate indicator of how well an employee is being compensated, but an inaccurate indicator of spending power.

Subscribe to the Sage Advice enewsletter

Get a roundup of our best business advice in your inbox every month.