No matter if you’re a global payroll manager or a CFO, you’ll always see two numbers at the top of a payslip. These numbers are gross and net pay and they are represented differently to an employee vs an employer.
While an employee will be more interested to understand the monthly net pay, an employer will take into consideration the annual gross pay. Knowing the differences will help you optimize your company’s payroll process and allow you to make the best choices when it comes to financial planning, especially if you need to calculate your payroll for different countries.
Differences between Gross Pay and Net Pay
When you prepare payroll for employees, you’ll need both net salary and gross pay on the payslip. Gross pay makes up 100% of the wages, and net pay is what you get after subtracting payroll deductions from gross pay.
The IRS breaks down some other key differences between gross salary and net salary:
|What it includes
|How to calculate
|Overtime, bonuses, or reimbursements from an employer, plus regular salary
|Annual Salary Amount / Number of Pay Periods
|Salary and bonuses, minus social security and taxes
|Gross pay – deductions
What is Gross Pay?
Gross pay is the amount employees earn before you withhold taxes, benefits and other payroll deductions from their salary.
Your entire gross salary is taxable, but all payroll processes need to include the gross pay to specify what the employee earned before any dedications were made. If you know what employees make and how you pay them, you can easily find out their gross pay.
Calculating Gross Pay
It’s fairly simple to calculate gross pay, you’ll need to know how many pay periods to factor in.
Companies can choose from several different pay schedules:
- Weekly – 52 payslips a year
- Bi-weekly – 26 payslips a year
- Semi-monthly – 24 payslips a year
- Monthly – 12 payslips a year
To calculate gross pay, you’ll take the annual income and divide it by the number of pay periods: annual income / # of pay periods.
Here’s an example: If a salaried employee earned $175,000 per year and got paid every two weeks, it would amount to: $175,000 / 26 pay pay periods = $6,730 every two weeks.
What is Net Pay?
Net pay is the income employees receive after all deductions are made. This is the final amount employees can use.
Here are a few factors that impact the net salary in the US:
- Federal income tax – calculated using a bracket system that increases based on income.
- State income tax withholding – some states use tax brackets that increase by wage, others don’t have income tax, and some cities use their own income tax.
- Social security and Medicare taxes – The Social Security tax rate is 6.2% and Medicare is 1.45%. These taxes are also called the Federal Insurance Contribution Act (FICA), and according to FICA, employers must match what employees contribute.
- Wage garnishments – In certain situations–like if an employee has debt–a court can order employers to withhold a percentage of an employee’s salary to pay the debt. Debt can include credit card debit, student loans, alimony, and so on.
- Health insurance – employers usually cover the majority of health insurance costs, but employees may also need to contribute to health insurance premiums for each pay period.
- Retirement savings – payments towards some retirement plans, like a 401(k), get taken out of gross pay.
- Form W-4 – When employees start a new job, they’ll usually fill out a Form W-4, which specifies their filing status and other sources of income. These details directly impact how much federal income tax is taken from their payslip each pay period.
How to Calculate Net Pay
To calculate an employee’s net pay, you’ll subtract tax withholding and other payroll deductions from the gross pay for that pay period.
Starting with the gross pay, here are the steps for calculating net pay:
- Step 1: Subtract pre-tax deductions such as a 401K, contributions employees make to their health insurance premium, and so on
- Step 2: Subtract federal tax withholding–you can find withholding amounts on the employee’s W-4
- Step 3: If applicable, deduct state and local tax withholding
- Step 4: Deduct FICA payroll tax
- Step 5: Consider if you need to make any other necessary specific deductions.
This process takes time though and is sometimes prone to human error, which could cause complications–such as fines or penalties– for employees and your business.
That’s why many companies enlist HR and payroll professionals who can easily manage this process, especially for businesses with global operations where the process differs from country to country.
Gross and Net pay for Hourly employees
For hourly employees there is a different formula. To calculate gross pay, multiply the hourly rate by the number of hours the employee worked during a pay period.
If an employee worked 40 hours and made $15 an hour, their gross pay would be $600.
Instead of working with a set yearly or monthly salary and factoring in a pay period, hourly workers get their salary according to an hourly rate and the number of hours they worked.
No matter where your employees are based, they need to can figure out what they’re earning before deductions and what they’re able to spend once taxes are withheld.
Global Gross and Net Pay
Just like you need to consider labor laws when hiring international employees, different countries have their own regulations for tax withholding.
Tax withholding in Brazil can be between 15-25%, and in Hong Kong, there is no tax withholding. This means that when factoring in different taxes and liabilities, your employees payslips will look different depending on the country.
A United Kingdom payslip will deduct National Insurance, Company Sick Pay (by law only if employee is sick more than four days in a row), student loans, and pension.
For employees earning payslips in Germany, companies will withhold Church Tax, gross health and pension insurance, gross Long-term Care insurance, unemployment insurance, and wage tax.
The Swedish payslip withholdings include Employer Social Security Contributions, preliminary taxes (based on the assumed income for the next year), health, wellness, and communication stipends, and holiday payroll deductions.
Effective Global Payroll
Any payroll manager anywhere will always see gross and net pay on their payslip and their employees’ payslips. That’s why not only understanding the difference between the two, but how to calculate each is non-negotiable for businesses to avoid liabilities and remain compliant.
This isn’t always easy, especially when calculations vary from country to country. To make sure you’re getting the right number every time, labor law experts–such as the ones from Papaya Global– can help calculate different payrolls according to the country’s laws.
See for yourself how our platform and global experts make it easy for you to manage your payroll. Schedule a demo.
What is an example of gross pay?
Gross pay is the amount of money an employee earns before companies withhold taxes. For example, if an employee makes $200,000 per year and got paid once a month, it would amount to: $16,666 per pay period.
Why is my gross pay more then my salary?
Your gross salary is the figure before factoring in social security, Medicare, federal income tax, state income tax (if applicable), retirement savings and so on. So while the gross salary is a larger figure than your net amount, you will get some of that money back when you retire or access your social security fund.
How do I calculate net pay from gross pay income?
To calculate net pay, you need to start with the gross pay amount and then subtract tax withholding and other payroll deductions from the gross pay within a certain pay period. Depending on what you owe in taxes or if you have outstanding debts such as student loans or alimony, net incomes per employee will vary, even if they earn the same gross pay.
What is the impact of benefits and bonuses on gross pay?
No, nothing is deducted from the gross pay amount before calculating net pay. If employers have a contract with an employee to earn $170,000 per year and they get paid bi-weekly, the gross amount per paystub will always be $6,538.
Can an employee negotiate their gross pay or net pay with their employer?
Employees can negotiate their gross pay with their employer before signing the contract. Net pay is factored into gross pay depending on which taxes the citizen is responsible for, which means they can’t negotiate net pay.