Gross Pay vs. Net Pay: What is the Difference?
Most people are budgeting their living expenses monthly. Not to get an unpleasant surprise on payday, you need to clearly understand the net vs gross pay difference. This will help not only to manage your income and expenses, but also to be better equipped to negotiate the wages with an employer.
Gross income means the sum of money before any payroll deductions (taxes, health insurance, etc.).
Net figure is what you get on your bank account after all the deductions have been taken out. If you are a beginner employee, there is an easy way for identifying them: a larger figure is gross, a smaller is net. Gross earnings are usually shown on the top of a monthly payslip, while deductions are listed below it. Net income is a figure left after this.
What Is Gross Pay?
Gross pay, also called base salary sometimes, is earned payment including all the payroll deductions. The lion’s share of deductions are various taxes that vary in quantity and percentage in different countries. The amount of a tax percentage also depends on the amount of earnings. Mostly, the higher the income, the higher the tax percentage is. The rest falls on retirement contributions, health insurance, incentives, and employee-specific deductions.
How to Calculate Gross Pay?
In fact, it is trouble-free, you can easily calculate it yourself. It depends on whether you receive an annual salary or an hourly payment.
Salaried employees are paid a fixed salary according to the job offer / employment contract. Typically, it is an annual amount divided over 12 months, e.g., if you get $60,000 per year, the gross payment is $5,000 per month. Your monthly income figure is always enumerated on your payslip.
Wage employees (hourly workers) are paid hourly. Just multiply the hours by the hourly rate, and you’ll get a wage. E.g., you want to calculate how much your employer must pay for a week. You worked 56 hours as a freelancer, and the hourly rate is $15 per hour. Then your wages will be $840. To get a monthly income just add each week’s earnings.
What Is Deducted from Gross Pay?
Payroll deductions are mandatory. The amount depends on the country and the region you live in.
Each country has its government’s taxation system. Typically, these are tax percentages depending on the size of the income. They are deducted from your gross payment. Depending on the country, taxes are paid either by the employer and you just receive your net salary, or it is the responsibility of the employee himself.
Mostly, a percentage of a gross income goes into a state pension fund. Also, in some countries citizens can contribute additionally to private or company pension.
Depending on a country, medical insurance can be mandatory or voluntary. Health insurance scheme, as well as the percentage for the deduction for health insurance also varies. Insurance premiums are typically subtracted from an income before tax.
Both types of incentives (long or short-term) are seen as taxable income. A bonus for achieving certain business goals, paid the same year, is a short-term incentive. A long term one can be a 2–5-year bonus which can be paid in equity / shares of the company, or in cash.
What Is Net Pay?
Net pay, also called take-home pay sometimes, is the amount of money remaining after all withholdings. That is actually the amount of money paid on your bank account after all the deductions and taxes.
How to Calculate Net Pay?
If you are not an HR professional, it is unlikely you’ll do it yourself. This requires certain legal and financial expertise. Anyway, your salary figure is in your payslip, just below a long list of taxes and deductions withholding.
How to Calculate Net Pay from Gross Pay?
To get a net salary, you need to subtract payroll deductions from a gross figure. That’s it. As previously mentioned, gross income is always a larger number, net is a smaller one.
In most job offers gross salary is indicated. Therefore, it is better to check whether the gross or net salary is indicated during an interview. If you are an employer, it is preferable to declare both salary figures for your employee to clearly understand how much will be paid into his / her bank account. The best variant is to have clear figures of net vs gross, and all payroll deductions enumeration. Clear agreements at the very start of cooperation are the key to success in the future. Now you have a comprehensible idea of the difference between net and gross.