Gross pay vs. net pay: What’s the difference?

You are probably familiar with the terms gross and net pay, but would you be able to name the exact differences off the top of your head? 

Don’t worry, we are not here to quiz you, we are here to help! On this page, we explain the difference between gross and net pay, how they are calculated and what deductions are most commonly made from your payments.

Too busy to read? Let our automated global payroll software do the heavy lifting for you! Here’s everything you need to know about outsourcing payroll for your business.

Simply put, gross pay refers to the amount of money your employees receive before any deductions have been subtracted. Deductions are usually made for income tax, and might also include contributions for health insurance or potential student loans or retirement funds, depending on your employee’s place of residence.

Net pay on the other hand describes the amount of money your employees get paid into their bank account after all the deductions have been made. 

Usually, salaries are given in a gross pay amount. Weekly or monthly payslips will then break down exactly how much has been deducted from that amount to get to the final net number that is transferred into the employee’s bank account.

How much is deducted from gross pay is highly dependent on your employee’s place of residence. On top of that, company-specific additional payments may also influence what is removed from gross pay.

Here are some of the most common deductions.

Income tax

The most common deduction made from gross pay is a percentage to cover income taxation. The amounts vary greatly depending on which country your employee lives in. Most countries use a progressive taxation system to calculate the tax percentage, meaning the taxable amount increases with rising income.

Tax offices often provide the taxpayers with free digital tools to calculate how much money is withheld from gross pay for taxes.

Insurances

Many countries have mandatory health care, which means that a certain percentage is taken from gross pay to cover universal health care. But other insurances such as unemployment or disability insurance might also be included and are therefore subtracted from the gross payment.

Pension

Another commonly removed payment from gross pay goes towards pension funds. Employees can often choose between a government state fund or private pension scheme. In some countries, these contributions are matched by the employer, meaning employees pay a certain amount of money from their gross pay into their pension fund, with the employers paying the same amount on top out of their own pocket.

Bonus payments

Incentive payments such as bonuses or holiday payments may be included on your payslip and are a great way to value your employee’s work and show your appreciation for their business contributions. However, these payments are also subject to taxation and are seen as taxable income. So if you pay out a bonus of $1,000, don’t forget to remove the appropriate income tax percentage from the gross pay.

Student loan repayments

Finally, some countries may charge students with loan repayments for their studies. These loan amounts are also taken out of the gross pay.

It is quite easy to determine your gross pay, however, the process slightly varies depending on salaried or hourly wage payments.

If your employees receive a fixed salary, all they have to do to calculate their gross annual income is to take the amount listed on their monthly payslips and multiply it by 12 to get an annual gross income.

Hourly paid employees most likely have varying payment amounts listed on each payslip, so multiplying one pay period’s amount won’t result in a reliable figure for their gross pay. 

One way to still get the gross income based on hourly wages is to either add up a full year’s worth of payslips, or base your calculations on potential future work hours. If you have agreed on an average work week of 20 hours, your employees can use the following formula to calculate their gross income:

Hourly pay rate x 20 hours per week = weekly gross pay

You can use the same process as outlined above to calculate the net pay. Simply add up the amounts listed on your payslip.

Alternatively, you could also calculate your net income yourself by identifying all applicable deductions and subtracting them from the gross pay. But this method is quite a bit more time consuming. 

Do you need help calculating gross or net pays for your employees or are looking to automate your payroll process all together? Lano’s software solution enables you to simplify your global payroll by automating data flows and consolidating payroll data for the entire team. Shoot us a message and we’ll tell you more about our global payroll solution.