Difference Between Gross Pay and Net Pay

Edited by Diffzy | Updated on: September 22, 2022

       

Difference Between Gross Pay and Net Pay Difference Between Gross Pay and Net Pay

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Introduction

There is no denying that working is a hardship. How lovely would it be if we could forever stay in bed? Picture it. The soft sunlight streaming through the curtains, the right temperature making you want to snuggle deeper into the sheets and the prospect of doing nothing for the rest of the day. Or a vacation? Can you see yourself atop a floating bed, sipping a cool summer drink with a lemon wedge in the glass, the lazy waves of the pool carrying you all over? Or a safari adventure? A happy herd of elephants bathing in the river water while you ride by in a jeep. The tourist guide chattering on about the mating and breeding times of the jungle cats while you take pictures on your polaroid camera. What bliss.

Yes, it would be awesome if you could do all of it without worrying about the monies. To accomplish all of those aforementioned scenarios, you have to have money. And the one and the only way you can make money is by working. Having an occupation serves more than income. It also keeps one busy and as implied by the term, occupied. It also serves to learn about one's interests and contribute to society. So, getting real, we have to have an occupation or a job. Having a job means getting paid. Getting paid makes those fancy dreams come true. But wait, there is a glitch here too.

Gross Pay vs. Net Pay

When one has a job, they would be in their capacity to expect a salary. A well-done job deserves credit, no? That is the case most often, but it is more complicated when taxes and benefits etc. come into play. Gross pay and net pay are two kinds of salaries an employee receives. Gross pay is the salary received before the deductions are taken away. Net pay is the salary that the employee takes home. It is the money that remains after the taxes, benefits etc. are deduced.

Differences Between Gross Pay and Net Pay in a Tabular Form

Table: Gross Pay vs. Net Pay
Parameters of Comparison
Gross Pay
Net Pay
Definition
Gross pay is the total amount of money that a person earns including all the benefits and allowances but before all the deductions.
Net pay is the amount of money that a person takes home after the deductions of taxes, provident funds etc.
Components
Gross pay includes components like House Rent Allowance, Conveyance Allowance, Medical Allowance etc.
Net pay includes components like Income Tax, Professional Tax,
Amount
Gross pay is the maximum amount of the salary that includes all taxes.
Net pay is a lower amount than gross pay after all the deductions.
Mode of calculation
Gross pay is calculated by summating all the payments.
Net pay is calculated by subtracting all the deductions.
The formula of calculation
Gross Pay = Basic Salary + Allowances (House Rent, Conveyance etc.)
Net Pay = Gross Pay – Deductions (Taxes, Provident Funds etc.)
Benefit
Gross pay offers benefits like holiday pay, incentives etc.
With net pay, individuals need not pay taxes at various levels as it is already deducted.
Also known as
Gross pay is also known as savings contribution.
Net pay is also known as take-home pay or in-hand pay.

What is Gross Pay?

Gross pay is the total amount of money a person will receive at their job before any deductions are subtracted from the salary. The deductions could be taxes, health insurance, student loan payments etc. Usually, when a job is offered, the salary promised is the gross pay. It is the figure stated in the employment contract. It is a fixed amount that has to be paid every month.

Gross pay also includes other earnings like interest payments and bonuses or incentives. In the payment slip, the largest amount listed is the gross pay. This amount is most often at the top of the payslip. The gross pay is different for a salaried employee and a wage employee.

For a salaried employee:

A salaried employee is offered a fixed amount of pay irrespective of the working hours. They are paid biweekly or monthly. When the salary is expressed as annual salary, gross pay for salaried employees is the amount that recurs every month. To calculate the annual gross pay, this amount must be multiplied by twelve.

For a waged employee:

A waged employee is paid hourly. There are two ways to calculate their annual gross pay. The first way is by simply adding the monthly gross pay of all the months from the payslips for the year. The second way, for calculating the future gross annual income, the following formula can be used -

Hourly pay rate x Guaranteed weekly hours = Gross pay of the week.

This weekly gross pay is multiplied by four for a monthly gross pay or by fifty-two for annual gross pay (fifty-two weeks in a year).

For example:

An employee works for 40 hours per week. The wage per hour is, say, 100 rupees.

The calculation for annual gross pay will be as follows:

100 rupees/ hour x 40 hours x 52 weeks = 2,08,000 rupees.

Gross pay is also known as savings contribution. Employees receive it without deductions like provident fund, taxes, medical insurance etc.

Gross pay includes the following components:

  1. Basic salary: It is the basic salary before any deductions are made or any extra components are added.
  2. Gratuity: It is the part of the salary paid by the employer to the employee to express their gratitude for their work for the company. Gratuity is paid by the employer from their resources or obtained from an insurance provider. It is generally paid to the employee when they retire or leave the company.
  3. House Rent Allowance (HRA): It is the component of the salary paid by the company for the accommodation expense of the employee for their rent.
  4. Salary Arrears: Salary arrears are paid when an employee receives a hike in their salary. For example, if the employee receives a hike in November that is applicable from January, the employee is eligible to receive the arrears of the past two months.
  5. Pension: Pension is the amount provided to the employee regularly after they have retired from the company.

Gross pay does not include the following components:

  1. Reimbursement or medical expenses
  2. Free meals or snacks
  3. Leave concession
  4. Leave encashment or the cash received in exchange for the leave unavailed by the employee.

What is Net Pay?

Net pay is the salary received by the employee after all the deductions are made from the gross pay. This amount is paid to the bank and contributes to the income. In the payment slip, following the amount of the gross pay, the deductions are listed. Following the subtraction of deductions from the gross pay, what remains is the net pay. It is the take-home pay or the in-hand pay.

Net pay can be calculated as follows:

Net pay = Gross pay – Deductions

The deductions from the gross pay vary from company to company. The following are the most common deduction seen on the payment slip:

  1. Taxes: These are compulsory deductions based on the taxation system of the government. The tax amount is subtracted at the source from the gross pay. Depending on the amount of the salary, a percentage of the income is deducted.
  2. Retirement contributions: This is the amount deducted that is added later to the employee’s pension. It is a percentage of the gross pay. Most countries use a percentage of the gross pay to be forwarded to the state pension. Some companies offer the option for a percentage to be dedicated to the private pension or the company pension in addition to the state pension.
  3. Incentives: Incentives can be of two types - long-term and short-term. A long-term incentive is when a three-to-five-year bonus is paid to the employee in cash or as shares or equity. A short-term incentive could be a bonus paid in the same year. These bonuses are seen as taxable income.
  4. Insurance: Insurance like medical insurance or health insurance form a part of the benefits package of the employee. These are deducted before the tax is applied.
  5. Employee specific deductions: If the employee requires certain equipment for the job or a particular gear or uniform, these expenses are also deducted from the gross pay. Such deductions are mentioned in the contract of employment.

It is important to note that some of these deductions are applicable pre-tax, while some are applicable post-tax. The pre-tax deductions like insurance and retirement contributions are deducted from the gross pay before the appropriate taxes are applied. The post-tax deductions like charity donations and union fees are deducted from the net pay after the application of the taxes to the gross pay.

Differences Between Gross Pay and Net Pay in Poins

Following are the main differences between gross pay and net pay:

  1. Gross pay is the total salary received by an individual. It includes all the benefits and allowances before the deductions. Net pay, on the other hand, is the take-home salary that the individual receives after all the deductions.
  2. Gross pay is the maximum amount of the salary, while net pay is a lesser amount than the gross pay since it experiences deductions.
  3. Gross pay includes components like House Rent Allowance, Medical Allowance, Conveyance Allowance etc., whereas net pay includes parts like Income Tax, Professional Tax, Provident Funds etc.
  4. Employers calculate gross pay by adding all the payments, while net pay is calculated by subtracting the deductions.
  5. Gross pay is calculated by the employers using the formula: Gross Pay = Basic Salary + Allowances. Net pay is calculated by using the formula: Net Pay = Gross Pay – Deductions.
  6. Gross pay offers benefits like holiday pay and other incentives. The advantage of net pay is that the individual will not have to pay taxes at different levels since it is already deducted.
  7. Gross pay is also known as savings contribution. Net pay is also known as in-hand pay or take-home pay.
  8. Gross pay is always a greater amount than net pay. Net pay is a part of the gross pay.

Conclusion

Gross pay and net pay are both parts of the salary received by the employee, but they differ from each other. Gross pay is the total amount released by the company for the employee before all the deductions are made. It is the maximum amount of the salary. It includes components like allowances, gratuity and pensions. It offers benefits like bonuses, holiday pay etc.

Net pay, on the other hand, is the part of the salary that is earned by the individual after all the deductions are made. It is also known as the take-home pay or the in-hand pay since it is the ultimate amount that is transferred to the bank as the income. Employers calculate net pay by subtracting all deductions from the gross pay. The components of deduction in net pay are taxes, retirement contributions, insurance etc. the benefit of net pay is that the individual will not have to pay taxes at different levels since it has already been deducted. So you see, it is hard to live a life of luxury when there are a bazillion components to be taken into consideration. Despite holding a respectable occupation with good pay, you have to pay taxes, retirement contributions and insurance among other things. There is no end to expenses. Even then, we dream of lavish extravaganzas shamelessly. Why there is no shame in dreaming. Who is to say you won’t marry a wealthy heir or heiress, win the lottery ticket, discover a treasure or be gifted magic beans? You will be the one rejoicing then as your dreams see fruition. Till then, well, work is life. Or a big part of life, for all work and no play makes Jack a dull boy.                                                                                            

References:

  1. https://www.bankbazaar.com/tax/gross-salary.html
  2. https://www.godigit.com/finance/salary/difference-between-gross-and-net-salary#
  3. https://n26.com/en-eu/blog/gross-pay-vs-net-pay
  4. https://www.hourly.io/post/net-pay-vs-gross-pay

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