What’s The Difference Between Gross Pay and Net Pay?

As part of “The ABC of the Financial World” project, CFPS continues to get our users familiar with complicated things and explain them in a simple way. Today we will talk about:

Gross Pay vs Net Pay: What’s the Difference?

To manage your personal finances as efficiently as possible, you need to know clearly the difference between gross and net salaries. It will also help you better understand how much tax you pay every month and better plan your spending.

How do you tell which is gross pay and which is net pay?

Gross salary is the amount of compensation before taxes. Sometimes that is what is stated in the employment contract. It is important to understand that you will end up with less than this amount. Net salary is the amount remaining after withholding all taxes and social dues and is actually your income.

Payroll employees can easily find out their gross and net pay. They receive a detailed monthly statement of their earnings and the tax paid. The top of the statement usually shows the gross salary, then all taxes and deductions, and below you can find the amount remaining after all withholdings: your net income.

What is deducted from my gross salary?

Payroll deductions depend directly on your country of residence and the company you work for. More often than not, you will find the following items on your payroll statement:

1. Taxes: They are mandatory and based on the country’s tax system. The amount is deducted from the gross pay. The percentage of tax depends on the overall income.
2. Pension contributions: They are calculated based on the gross salary, just like taxes. Most countries set a certain percentage of salary to pay the state pension, while others offer the opportunity to opt for a private or corporate pension plan.
3. Tax on bonuses: Incentive payments can be classified as long-term or short-term. For example, a short-term incentive might be a holiday bonus or a spot bonus. A long-term incentive could be a 3 to 5-year bonus paid in cash, equity, or company shares. It is important to remember that these bonuses are treated as taxable income.
4. Insurance: Health insurance is most often included in the benefits package and deducted from your salary. The amount directly depends on the place of work and country of residence and is also withheld from the gross pay.

In some cases, these deductions are applied to gross pay, for example, pension contributions and insurance. However, trade union dues or mandatory charitable donations are withheld from net income.

How can a payroll employee calculate the gross and net income per annum?

It will depend on how you are paid and whether you are paid yearly or hourly. A salaried employee is usually paid a fixed amount of money divided into 12 parts. In the case of hourly pay, the total amount will vary with the hours worked.

When you receive an annual salary, you are likely to see a recurring amount on each payroll statement. Add up the pre-tax amounts on all twelve statements, or multiply the monthly income by twelve to get the annual gross salary. To calculate the net pay, identify how much you pay in taxes each month and subtract that number from your gross income.

It is important to make sure you take into account any bonuses, additional taxes, or long-term incentive payments to calculate the correct amount.

How can hourly employee calculate their gross income?

If your working hours do not change, simply add up the pre-tax amounts indicated on your payroll statements. If you want to calculate your income from scheduled hours that you have not worked yet, use a simple formula: multiply your hourly rate by your scheduled working hours per week and get your weekly gross pay.