What is the relationship between net pay and gross pay?

The relationship between net pay and gross pay is defined by the deductions that are taken from an employee's earnings. Gross pay refers to the total amount earned by an employee before any deductions are applied, which can include taxes, retirement contributions, and other withholdings.

Net pay, on the other hand, is the amount the employee actually takes home after these deductions have been subtracted from the gross pay. Therefore, the correct understanding is that net pay is derived from gross pay by subtracting these deductions. This means that if you want to find out what an employee will receive in their paycheck, you start with the gross pay and subtract all applicable deductions, leading to the net pay amount.

Understanding this distinction is crucial for effective financial planning and budgeting, as the net pay directly affects how much money one has available for expenditures, savings, and investments.