The first time you looked at a paycheck, you may have seen a large number and been very happy, only to have your excitement dimmed when you cash the check for a much smaller amount. That is because gross pay and net pay refer to two different accounting concepts. They each describe income, but only one takes operating costs and other expenses into account. You might be asking yourself why accountants need two different ways to describe income in the first place. Even though you might only care about the amount of money you actually take home, federal and state governments (and creditors and bankers) are usually more concerned with the amount of money your company actually pays you.If you aren’t sure whether the number you are looking at represents net or gross pay, continue reading to learn more.
In this post, I will compare gross vs. net. I will use each of these words in at least one example sentence, so you can see them in context. Plus, I will show you a helpful memory tool that you can use as a reminder of the most appropriate word.
Gross as adjective:
Something that is very obvious and unacceptable.
The gross amount of the gift was £1,000.
Gross as adverb:
Net as noun:
Net is a material made of threads of rope, string, wire, or plastic with spaces between them, allowing gas, liquid, or small objects to go through, or an object made with this material that is used to limit the movement of something.
The living-room windows have net curtains.
Net as adjective:
Much stays the same, but there are increases in income phase-outs for IRA contributors, to the adjusted gross income limits for snagging the saver’s credit, and to the overall defined contribution plan limit—up to $54,000–a boost for self-employed and small business owners and workers who have the option of stuffing their retirement nest egg with aftertax dollars. (Forbes Magazine)
Although the U.S. economy is moving relatively slowly, Roberts pointed out American consumers are the strongest element within the economy, which is measured by gross domestic product, or the total value of goods and services. (The Commercial Appeal)
Penske Automotive Group Inc.’s third-quarter net income rose 1.1 percent as gains in gross profit margins in the U.S. for new and used vehicles were offset by foreign exchange-related losses and lower global profit margins for vehicle sales. (Crain’s Detroit Business)
Gross or net:
Both net and gross are ways to describe a person’s or company’s income. Gross describes the total before deductions and taxes. Net describes the total after the deductions and taxes. On a paycheck, the net pay will be your “take home” pay. Since net and take home both contain the letter T, you can use this phrase to remember the meaning of the word net in financial contexts.