Gross Pay vs. Net Pay: Definitions and How to Calculate
Gross pay, or gross income, is the total amount you earn—typically over the course of a year—before expenses.
Net pay, also referred to as net income or net salary, is the profit your business earns after expenses and allowable deductions.
With a good understanding of financial terms and how set the right bill rate, you can ensure sustainability and success for your business.
As an independent professional it’s important to understand key financial terms. There will be a financial component to every part of your job, from the beginning of a project when you are negotiating with a client about your rates and writing a contract, to the end of a project when you are invoicing a client for the work you completed. With a good understanding of financial terms and how set the right bill rate, you can ensure sustainability and success for your business.
What is Gross Pay?
Gross pay, or gross income, is the total amount you earn—typically over the course of a year—before expenses. Think of gross pay as the profit you’ve made from the services you provide to your clients. It is the sum of all your client billings before any deductions, taxes or withholding.
Add up your total client billings for the past year to calculate your estimated annual gross income. For example, if your client billings from the past year add up to $75,000 in revenue, that number is your gross pay or total gross income.
Calculating your gross pay as an independent professional is important because it allows you to assess the revenue potential of your business so you can see how you are doing year over year. As you calculate gross pay, take a look at your various revenue streams. Are there certain clients or types of projects bringing in more or less income? Answering these questions can help you set better goals for your business and can influence where you choose to direct your time and effort.
What is Net Pay?
Net pay, also referred to as net income or net salary, is the profit your business earns after expenses and allowable deductions. Deductions can include federal and state taxes, social security and Medicare taxes (FICA), or health insurance costs. In order to calculate your net pay, subtract all of your business expenses from your gross income. Business expenses can include marketing or advertising costs, office expenses, and tax payments as well as eligible deductions such as home office space, health insurance, or professional fees. Check out our bill rate calculator to calculate your ideal bill rate based on information like your desired net pay.
Understanding your net pay is a good way to assess the health of your business. If your gross pay, for example, is significantly higher than your net pay you may want to take another look at your expenses to see what you can eliminate.
The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.
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