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The Difference Between Net Pay and Gross Pay: A Basic Guide for Your Business

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Understanding how to handle payroll for your small business can easily turn into a nightmarish quest. Different kinds of pay, deductions and labor laws all need to be considered and handled properly. 

To stay on top of legal requirements and payroll rules, you just have to start tackling the essentials one by one. Grasping the difference between gross and net pay is probably the first one to conquer. Besides differentiating between the two types of pay terms, you should also stay on top of the different deductions and exemptions. 

In the sections below, you can find out not only how gross and net pay relate to each other, but also how to calculate them for your company’s payroll. 

Difference Between Net Pay and Gross Pay
Difference Between Net Pay and Gross Pay

What Is the Difference Between Gross Pay and Net Pay?

When you offer a contractual agreement to a potential hire, that typically includes the gross amount they would receive if employed. The gross pay is their total salary before any taxes and other withholdings are deducted from their paycheck. 

The net pay is the income that an employee would receive after all possible deductions have been made. This represents the actual total amount of money they can use, or their take-home pay. 

When preparing payroll for your team, you would need to include both net and gross pay on the pay stubs. The gross pay usually appears first, followed by details about the various withholdings that apply for the employee. Afterwards, the net pay amount should also be included.  

Calculating Gross Pay

The definitions of gross and net pay are easy to grasp. However, the payroll battle gets tough when it comes to calculating payments for different types of workers. 

Gross income signifies the total yearly amount that an employee earns. In order to calculate the gross amount for a monthly term of a salaried worker, you can use the following formula:

Gross pay = annual gross salary / 12

For example, if the annual gross pay of a team member is N1,200,000 and you want to calculate the monthly pay, you can divide N1,200,000 by 12 months. The result is N100,000 

Formula for Calculating Net Pay

In order to calculate an employee’s net pay, you have to first determine the gross pay, following the formulas in the previous section. 

Then, you can make the following subtraction:

Net pay = gross pay – all types of deductions

This formula also appears quite straightforward. 

Basics about Payroll Deductions and Tax Withholdings

What types of deductions and withholdings do you have to keep in mind in order to calculate your payroll correctly, and more specifically – the net pay? 

The main income tax withholdings from an employee’s paycheck is the Personal Income Tax. All employers are required to withhold relevant tax (PAYE) from their employees and remit monthly to the Lagos State Internal Revenue Service(LIRS).

Employers must begin deducting tax from the salaries and wages of their employees after 6 months of the company commencing business operations. The deducted taxes are remitted to the LIRS, which is the tax regulatory body for Lagos State through any designated collecting bank. After payment has been made to the collecting bank, the employer will take evidence of payment to its tax office. Your tax office should be the nearest tax office to your primary operating premises. 

As an employer, you must ensure that PAYE is remitted to the LIRS before the 10th of the month following the month when the deductions were made. E.G January PAYE must be remitted on or before February 10th. Note that contract employees and interns are not exempted from PAYE deduction. 

There are also other deductions that you may need to take out from an employee’s gross pay to calculate their net pay. Some of the typical ones include the National Housing Fund, Pension Scheme among others.

Need Help with Handling the Payroll for Your Business?

Are you prepared to take care of all payroll requirements – beyond net and gross pay? If you want to operate a successful business, you need to be. You have to comply with a number of laws, such as having a payroll register, issuing the right pay stubs, and keeping your payroll records for at least three years. 

How can you stay on top of payroll? Hourly is here to help. 

Get started today with the Hourly app on your mobile device.

This article was contributed by Ralitsa Golemanova and originally posted on

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