What is the distinction between gross pay and net pay?

The distinction between gross pay and net pay is clearly defined in the concept of income in the context of personal finance. Gross pay refers to the total earnings of an employee before any deductions are made. This amount includes wages, salaries, bonuses, and any other earnings before taxes and other deductions. In contrast, net pay is the amount the employee actually takes home after all mandatory and voluntary deductions have been subtracted from the gross pay, including federal and state taxes, Social Security contributions, health insurance premiums, and retirement plan contributions.

This understanding of gross and net pay is fundamental for anyone managing finances, as net pay directly impacts personal budgeting and spending capabilities. Knowing the difference helps individuals understand how much they will realistically have available for expenses after the various deductions are applied.