Lessons · Accounting · payroll: gross pay to net pay
Payroll: from gross pay to net pay
Gross pay is what the worker earned. Withholdings are taken out of it and held for whoever they are owed to. Net pay is what reaches the worker. The expense is the gross; the withholdings are a liability until they are sent on.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
What it is for
A worker asks why 1,000 of wages became 820 in the bank. The payslip is the answer, and the books have to say three things at once: what it cost the business, what the worker got, and what is being held for someone else.
How to think about it
Hours times rate is gross. Each withholding is a share of gross, at whatever rate applies where you are; here the problem gives it. Gross less withholdings is net. Then one entry: debit gross to wages expense, credit each withholding to its payable, credit cash for the net.
Worked example
Gross = 40 hours × 25.00 = 1,000.00What was earned.
Withholding at the flat rate given here, 18%: 1,000 × 0.18 = 180.00Taken out of gross and held. The rate is whatever the rules where you are say; this example simply states one.
Net pay = 1,000 − 180 = 820.00What goes to the worker's bank.
Dr Wages expense 1,000 / Cr Withholding payable 180, Cr Cash 820One entry, three accounts. Debits 1,000, credits 180 + 820 = 1,000.
Your turn
Gross 1,400, net 1,190. Write the line with the withholding filled in.
Net pay = 1,400 − = 1,190
Solve one, graded on the server
The trap
Expensing the net. The business's cost is the gross; the 180 it held back is still its money to hand over, and the liability has to be on the books until it is.