Net of tax

Net of tax is a term used to describe the amount of money left after taxes have been deducted.

Homebase Team

Min Read

What does net of tax mean?

Net of tax is a term used to describe the amount of money left after taxes have been deducted. It’s essentially the actual amount someone or a business receives or keeps after paying taxes—whether it's income tax, payroll tax, or taxes applied to a bonus, sale, or investment.

For small business owners, understanding what “net of tax” means is important when calculating take-home pay, budgeting for bonuses, or planning business expenses. With Homebase, you can automate payroll calculations and ensure employees know exactly what they’re taking home, net of tax.

Net of tax vs. gross pay

To put it simply:

Gross pay is the total amount before taxes and deductions.
Net of tax (or net pay) is what’s left after taxes are taken out.

Let’s say you offer an employee a $1,500 bonus. If you want them to receive the full $1,500 after taxes, you’d need to “gross up” the payment. That means calculating how much more to pay so that the amount left after tax equals the promised amount.

When is the term net of tax used?

You’ll hear "net of tax" in various business and finance settings. A few examples include:

Employee bonuses – “We’re giving you a $1,000 bonus net of tax” means the employee will receive $1,000 after deducting taxes.
Sales and contracts – “The company earned $25,000 net of tax” means that’s what’s left after paying applicable business taxes.
Investments and capital gains – Net-of-tax income refers to what remains after taxes are applied to profits.

In these situations, the focus is on what’s received or kept—not just what’s initially earned or quoted.

Why it matters for payroll

From a payroll perspective, net of tax comes into play anytime you calculate what an employee takes home. Payroll systems automatically deduct things like:

Federal income tax
State and local taxes
Social Security and Medicare (FICA)
Any pre-tax benefits or contributions (like health insurance or retirement plans)

The result is the employee’s net pay, or what lands in their bank account. Understanding this helps employers communicate compensation and avoid confusion about paychecks.

Sign up for Homebase to simplify payroll, pay transparency, and workforce management all in one place.

How to calculate a net-of-tax amount

You need to work backward if you want to guarantee someone receives a specific net amount. This is common with bonuses or reimbursements. Here's how:

Net pay = Gross pay - Taxes

But if you’re starting with the net amount and want to figure out what gross amount to pay, use this formula:

Gross pay = Net pay / (1 - tax rate)

For example, if you want your employee to receive $1,000 after taxes and their combined tax rate is 30%:

Gross pay = $1,000 / (1 - 0.30) = $1,428.57

You’d pay $1,428.57; after taxes, they’d take home $1,000.

Whether offering a bonus, running payroll, or analyzing business income, “net of tax” gives you a clearer picture of actual earnings. For employers, knowing how to calculate and communicate net amounts helps with budgeting, compliance, and employee satisfaction.

Sign up for Homebase to simplify payroll, pay transparency, and workforce management all in one place.

How transparency affects employee morale

Employees often care most about what ends up in their pocket, so offering clear, easy-to-understand explanations about net pay can go a long way. Being transparent about how much is withheld and what each deduction is for builds trust and improves morale.

Using a tool like Homebase Payroll, you can generate detailed paystubs showing gross pay, taxes, deductions, and net pay. That way, there’s no guesswork.

Try Homebase Payroll to automate pay calculations and clearly show employees what they’re earning—net of tax.

‍

FAQs

No items found.