Key Takeaways
1. Gross pay and net pay are important concepts for employers, employees and other workers to understand. Job adverts normally quote gross pay, while employees will normally receive net pay. Contractors generally receive the gross pay amount but must then meet their own tax and other liabilities.
2. Income tax levels, social security and health system contributions and local taxes can all vary widely from country to country. Employer obligations in providing pension, health insurance, childcare and other contributions will also vary. These factors will all affect the final amounts of gross pay vs net pay.
3. Clear and unambiguous corporate communication of why, when and how tax and other deductions are taken can help prevent misunderstandings. Business and HR leaders should stay abreast of political and taxation changes, as well as any particular areas of staff concern or confusion.
4. International companies must be especially careful in correctly administering employee tax and other deductions from gross pay, as well as making timely payments to governments in their operating countries. Expert local advice can be valuable in ensuring compliance, especially during periods of commercial, political or economic uncertainty.
Businesses, employees and contractors should all be aware of the difference between gross and net pay, what they should expect to be paying out or receiving, and the timing of pay periods and tax cycles. They also need to be aware of the laws relating to payment (such as whether or not employees can be paid in crypto).
When workers are beginning their careers, business leaders are starting or expanding their companies, or contractors are setting up on their own for the first time, it’s a good time to think about gross and net pay. In terms of principles or practice, mistakes or misunderstandings in this area can be costly.
What is gross pay?
Gross pay is the amount of money earned before any payroll deductions (e.g. tax, pensions contributions etc..) are applied. This is the figure normally quoted in job adverts or when negotiating a starting salary.
While the term is usually used in the context of employees, it is also sometimes used when talking about paying independent contractors.
Bonuses are included in gross pay, although in some cases they may be taxed at a different rate from normal salary payments. Property and services received in return for work done (sometimes called ‘benefits in kind’) may also be included.
Governments often produce guidance and calculators which can help workers to convert between gross and net pay amounts, as well as calculators for estimating income tax and any other taxes due from gross pay.
What is net pay?
Net pay is the amount of money that a worker receives after all taxes and key payroll deductions have been made. This is the amount that you will receive from your employer each pay period, whether deposited in your bank account or paid in some other way.
What is deducted from gross pay?
Exact deductions made from gross pay can vary between individuals, between employers, from country to country, or between states and regions within countries. Payroll and HR leads for your company should be able to clarify and explain deductions made to gross pay: Where operating internationally, this is a crucial element of global payroll implementation.
Where businesses have remote workers based overseas they need to think about how to pay remote employees, and make the right deductions, in line with the rules in that employe’s country of residence.
Some of the most common deductions include:
- Taxes
- Income tax and any other relevant payroll tax, local or national taxes will be deducted from gross pay by your employer. This money then goes to the government of your country in order to fund public goods and services or national programs around defence and security, roads, law enforcement, foreign affairs etc.
- Note 1. It is vital that international businesses are fully compliant with employer tax and legal obligations across all their countries of operation. To avoid compliance issues, companies should seek expert local advice when before recruiting and establishing payroll in new countries.
- Note 2. The term “payroll tax” can mean different things in different countries. Read our comprehensive guide What is Payroll Tax? to find out more.
- Public health system, social security and/or care contributions
- In many countries, workers pay an automatic contribution towards national health, social security or social care systems. In the UK, for example, workers (and employers) contribute National Insurance payments via a percentage contribution from gross pay. In the USA, FICA contributions are taken to fund medicare and social security.
- Pension or retirement plan contributions
- Employee and employer contributions to official pension or retirement plan savings schemes may be deducted straight from gross pay. In many countries these contributions will be tax deductible or eligible for tax relief up to a specified limit. Individuals may choose to put more or less gross pay into their pension / retirement scheme according to the most tax efficient option for their situation.
- Health insurance premiums
- In countries where private healthcare is necessary, payments may be tax deductible and/or directly taken from gross salary and paid to health insurers by employers. Again, some workers may choose to contribute to more expensive health plans, or to take out additional health or dental insurance beyond meeting essential needs.
- Organizing this deduction can get particularly complicated when considering health insurance for remote workers.
- Student loan repayments
- Student loan payments may be taken straight from gross salary payments through an employers’ payroll. Higher education is free in some countries (e.g. Denmark, Norway, Finland, Germany) and official student loan repayment schemes of this sort will not exist in these cases.
- Other
- Some employers may offer car or train ticket loans from a booking platform, or salary advances for other purposes, which are then paid back in installments from gross pay. Other common deductions might include union dues, charitable donations, childcare costs contributions, or court ordered payments towards debts or child maintenance.
How do I calculate gross pay and net pay?
The principles of calculating gross pay and net pay are simple. In practice, some individuals may have more straightforward or more complex situations than others.
Keep in mind, that no matter which calculation methods you use, gross pay, net pay and deductions should be itemized on an employee’s pay stub.
1. Calculate gross pay
For salaried employees with a single employer, gross pay will simply be their annual salary divided by the number of pay periods in a year. If an employee is earning $60,000 and is paid on a monthly basis, their gross monthly pay will therefore be $5000.
For hourly workers, gross pay can be determined by multiplying pay rate per hour by the number of hours in a pay period. So, if a worker is paid $20 per hour, contracted to work for 37 hours per week, and paid weekly, their gross weekly pay will be $740.
2. Work out total compulsory deductions
Tax rules and employment laws in the country of employment will determine levels of mandatory deductions for income tax, social security contributions etc..
3. Decide total voluntary deductions
Some deductions are voluntary, or the level of deduction can vary in line with employee preference. For example, an employee may choose to receive a higher level of pay in the form of pension contributions than cash in order to reduce the tax they pay. One employee may join a staff union and pay monthly dues, while another may choose not to etc..
4. Subtract total deductions from gross pay to get net pay
To obtain net pay, add together all mandatory and voluntary deductions and subtract this from gross pay.
What is gross income vs net income?
Companies, contractors and employees with other income sources beyond their main employment will also have to think about gross income vs net income.
For businesses, gross income will generally be their total revenue from sale of all goods and services in a given period. Their net income would then equal their profit, calculated by subtracting all expenses and allowable deductions from gross income.
For individuals, gross income will be the total of their gross earnings across all jobs plus income from other sources (e.g. rental income, savings interest, receipt of property, goods or services instead of cash). Net income will be this amount after all relevant tax and other deductions.
Manage net pay and deductions with Horizons
Working out the difference, gross pay vs net pay, might seem simple for a company operating in one country, with a workforce all on permanent employment contracts. For international businesses, especially those with a diverse workforce of permanent and temporary employees and contractors across multiple countries, administering payroll will be more complex. Bringing in expert help can save both time and money.
Horizons has the competence and experience to manage the payroll of all international employees and contractors, including making the right deductions from net pay and ensuring local compliance at all times. Get in touch today for a tailored quote for your company.
Frequently Asked Questions
Gross pay is the amount of money paid by an employer for an employee’s work before taxes and other deductions are made. This is the figure typically quoted in job adverts. Net pay is the actual amount of money which you will receive from your employer in each pay period after all relevant deductions are made.
Net pay will therefore be lower than gross pay with the exact percentage difference depending on your country’s tax regime, your salary level, and your wider personal circumstances.
Deductions from your gross pay will vary according to your country, your salary level, your employer and individual circumstances. To calculate net pay, you should total all relevant national and local taxes, healthcare system and/or health insurance contributions, pension contributions, and other possible deductions (e.g. union dues, loans, savings, debt repayments etc..). Subtract this total from gross pay, and you should have your net pay.
If an employee is unsure about taxes and other deductions being made from pay, they should seek quick clarification from HR or payroll leads.
