Net Pay
Definition
Net pay is the amount an employee actually receives after taxes and deductions are taken out of gross wages. Net pay is not the full payroll expense.
Example
An employee earns $5,000 in gross wages. After $1,000 of withholdings, the employee receives $4,000 in net pay. The wage expense is $5,000, not $4,000.
Why It Matters
Recording only net pay as the expense understates payroll costs. The withholdings are also liabilities until paid to the tax agency.