What’s the difference between gross pay and net pay?
Understand the difference between gross vs. net salary and learn what it means for your salary.
5 min read
Understanding the difference between gross pay and net pay is key to knowing how much money you’ll receive on pay day. It’s also important for understanding your taxes, and can help you budget for your monthly living expenses. Here, we’ll explain the key differences between gross vs. net salary and share how to calculate it. Let’s go!
What is gross pay vs. net pay?
Gross pay is the amount of money an employee receives from a company before any deductions —such as health insurance, taxes, or student loan payments—are taken out. When a job is advertised, the salary offered is usually listed as the gross pay. This is also sometimes known as your base salary, and excludes any short or long-term incentives or benefits. Net pay is the money left once taxes and deductions have been taken out of your gross pay. This is the amount that is paid into your bank account and constitutes your income. If you’re a salaried employee, you will typically receive a breakdown of your salary each month on your payslip. Gross pay will usually be shown here—this is the higher figure and is often listed at the top of the slip. All taxes and deductions will typically be listed below it. Next to each of these items, you’ll see an amount of money, which is what will be deducted from your gross salary. The figure left after this is your net pay.
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The deductions taken out of your gross pay can differ depending on what country you live in and the company you work for. However, here are some of the most common deductions you might spot on your payslip:
Taxes. These are mandatory and based on the government’s taxation system. The amount is deducted at source from your gross pay. Depending on how much your overall salary is, this tax will be a percentage of your overall income.
Retirement contributions. This is the money that goes into your pension—usually a percentage of your gross salary. Most countries deduct a certain percentage of your salary to go toward your state pension, and some offer the option to contribute to a private or company pension in addition.
Incentives. These can be long or short-term. For example, a short-term incentive could be a bonus paid within the same year after certain targets are met. A long-term incentive could be a 3-to-5-year bonus paid as cash, equity, or shares in the company. It’s important to remember that these bonuses are seen as taxable income.
Insurance. Health insurance is probably part of your benefits package, and therefore deducted from your salary. The amount depends on where you are working and what the health insurance scheme is in that country. Usually, insurance premiums are subtracted from your income before tax.
Employee-specific deductions. If you need to wear a certain uniform or use special equipment to do your job, you could be eligible for an allowance toward these costs. This will need to be defined in your employment contract.
Remember that some of these are pre-tax deductions, which means the money is taken from your gross salary before the relevant taxes are applied—like retirement contributions or healthcare, for example. There are also post-tax deductions, which are sometimes taken from your net pay or after the taxes have been applied, such as union fees or charity donations.
How to calculate your gross income
This will depend on how you’re paid and whether you receive an annual salary or hourly pay. A salaried employee will be paid a fixed amount, usually divided over 12 months. If you’re being paid by the hour—also sometimes known as a wage employee—your payment will vary depending on the number of hours you work. So, let’s look at the different calculations for gross income.
How to calculate gross income if you’re a salaried employee
When you’re paid an annual salary, you’ll often see a recurring figure on every payslip, showing your gross pay for that month. Multiply your gross monthly income amount by 12 to find out your annual gross salary. Make sure you take into account any short or long-term bonuses you might receive to land at your total gross number.
How to calculate gross income if you’re a wage employee
As a wage employee who’s paid hourly, there are two ways to calculate your gross income. If you have monthly payslips for the previous year, simply add each month’s gross income together to find out your annual gross income. It’s worth noting that this will be different if you’re trying to work out your future income. If you haven’t worked these hours yet—but you’ve agreed to regular working hours—you can work out your gross pay using this calculation:Hourly pay rate x guaranteed weekly hours = weekly gross payYou can then calculate your monthly pay by multiplying by four weeks, or annual gross pay by multiplying by 52—the number of weeks in a year. Make sure you deduct weeks you know you’ll be taking as vacation days.
How to calculate net pay from gross pay
Helpfully, all the information you need should be on your payslip, so make sure you look this over carefully before you start any complex math equations. Gross pay will typically be the top figure you see before any deductions have been made. Your net pay will then be the last number at the bottom of your payslip and should be consistent with the amount of money deposited in your bank account. N26’s bank account can help you manage your salary better each month using the built-in Statistics feature. It automatically categorizes all your transactions and purchases, so you can keep track of your spending habits and see exactly where your money is going.
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