What is Gross Pay vs. Net Pay and How to Calculate

By MBO Partners | November 12, 2020

Share
MBO red logo

MIN 3 READ

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.  

Related Posts

How Much Should I Charge as a Consultant?
| < 1 MIN READ

How Much Should I Charge as a Consultant? (Guide)

August 12, 2022

MIN < 1 MIN READ If you’re just getting ready to find your first consulting project or already well along on your journey, you have most likely grappled with this basic question.

consultants working
| 5 MIN READ

How to Write a Consulting Contract: 6 Best Practices

July 27, 2022

MIN 5 READ Writing contracts is an important part of your business as an independent professional. A contract defines the work you agree to do for a client, and it also provides you with legal protection.  Contract negotiation can be an intimidating part of starting a new project but setting up this legal framework will help protect you…

consultants shaking hands
| 3 MIN READ

Top 5 Common Contract Mistakes to Avoid

July 20, 2022

MIN 3 READ Contracts are an important part of starting a new project. They provide legal protection, discuss services to be performed, and include payment terms and conditions. If you’re new to the process, you may find that drafting a contract is a complicated task, requiring specific key terms, provisions, legal obligations, and ultimately, client agreement.  As a…

Trending

Tags

Learn more about the MBO Platform

FOR INDEPENDENT
PROFESSIONALS

Start, run, and grow

your independent business with MBO

FOR
ENTERPRISES

Engage, scale, and optImize

your independent workforce