For businesses that are looking to grow and compete at the highest level, global talent is one of the best resources they can tap into. However, when it comes to paying those global employees compliantly, many companies hit roadblocks. A common challenge is understanding net pay and gross pay—what the differences are and how to calculate each in different jurisdictions.
In this guide, you’ll get a deeper understanding of the differences between the two and gain valuable knowledge about paying employees compliantly. Let’s jump right in!
What Is Gross Pay?
The definition of gross pay refers to the salary or hourly rate an employer pays an employee. This amount reflects what the employee earns before any withholdings, such as taxes imposed by any given country. For example, if an employer pays a salary of $70,000 per year to an employee, that $70,000 is the employee's gross annual income.
In addition to an employee’s base salary, gross pay may also include any overtime pay, commissions, bonuses, sick pay, and holiday pay. Gross pay also includes any imputed income, known as fringe benefits. Certain benefits must be reported as taxable income while others are exempt. Regulations vary per country and jurisdiction.
For example, in some countries, things like gym memberships, cash awards, and bonuses are considered part of employees’ compensation and are subject to taxes. Meanwhile, accident and health benefits, employee discounts, and group life insurance might not be taxable. These tax regulations differ from country to country, so if you plan to offer fringe benefits on top of employees’ salaries, it’s important to understand which benefits must be reported as taxable income to remain compliant with payroll withholdings.
What Is Net Pay?
Net pay, or take-home pay, is the money an employee receives as payment for their work. The meaning of net pay is the compensation an employee actually takes home via their paycheck or direct deposit after various deductions are subtracted from their gross pay.
These deductions fall under two categories: mandatory deductions and voluntary deductions. Mandatory deductions are those required by law to be withheld from an employee’s paycheck, while voluntary deductions are those that are supplementary.
Mandatory deductions are required by law to be withheld from an employee’s gross pay. The most common mandatory deductions are for income taxes, payroll taxes (such as contributions to social security), and contributions towards mandatory benefits. It’s worth noting that every country and jurisdiction has different requirements for these deductions.
Voluntary deductions are not required by law; instead, they’re agreed upon within the employee’s employment contract. Common voluntary deductions include retirement contributions, health and dental insurance premiums, and union dues. For employees, these deductions help to reduce their taxable income and overall tax burden while allowing them to enjoy certain long-term benefits.
Once you’ve determined the proper mandatory and voluntary deductions based on local laws and the employment contract, you can properly calculate net pay.
What Is the Difference Between Gross Pay and Net Pay?
The difference between gross pay and net pay is that gross pay is what an employee earns on paper, and net pay is what an employee actually takes home. For example, an employee could be salaried at $70,000 (that’s their gross pay), however their annual take-home pay might actually be closer to $58,000 after all deductions (that’s their net income).
When determining what to pay for an employee’s salary, gross pay is the amount you’ll factor into your budget, as it’s the basis for an employee's payroll calculations and determines an employee’s net pay. Gross pay also dictates tax payments and overtime pay.
How to Calculate Gross Pay and Net Pay
Accurately calculating gross pay and net pay is critical for your business's compliance. Fortunately, both net pay and gross pay are fairly simple to calculate.
How to Calculate Gross Pay for Hourly vs. Salaried Employees
Once you know an employee’s gross pay, it simplifies every other calculation while running payroll. To find that number, you’ll need to consider whether an employee is hourly or salaried, as you’ll calculate gross pay for hourly employees differently than that of salaried employees.
To Calculate Gross Pay for an Hourly Employee:
- Multiply their hourly rate by the hours worked in a pay period.
- Add the pay for any work that is considered overtime according to the local jurisdiction.
To Calculate Gross Pay for a Salaried Employee:
- Determine how many pay periods your business has each year, according to your payroll schedule.
- Divide the employee’s annual salary by the number of payroll periods to find the gross pay amount for each paycheck.
- Add any additional forms of compensation like fringe benefits or commissions to the gross pay.
What’s Deducted from Gross Pay?
To calculate net pay for an employee, you’ll need to make various deductions from their gross pay. Common deductions include things like:
- Income taxes (national and regional)
- Mandatory payroll taxes (such as social security contributions)
- Benefit contributions, taxes, and premiums (such as healthcare)
Making the proper deductions from each employee’s gross pay is essential for compliance and employee retention. If you don’t deduct the right amounts each pay period, your business could be penalized, or your employees could find themselves owing money to the local tax authorities.
Gross and Net Pay FAQs
Gross pay and net pay are two essential concepts for employee satisfaction and business compliance. However, they can be complicated. Here, we answer a few other common questions about payroll.
What If My Employees Are Globally Distributed?
If you have a global team, it can be especially challenging to determine gross pay vs. net pay while ensuring that you’re paying remote employees compliantly. You might be tempted to keep all your employees under one proverbial “roof” just to avoid the headache of paying employees around the world, but you shouldn’t sacrifice compliance for convenience.
Using global payroll services like a PEO or an EOR can help simplify the process of paying distributed employees. Otherwise, your business will likely sink so much time into researching the proper regulations that building a global team could become cost-prohibitive.
How Can I Help My Employees Understand Net Pay vs. Gross Pay?
Depending on your business, your employees may not be very familiar with terms like gross pay and net pay, and they might have questions about why their paycheck doesn’t add up to the wages they’ve earned. To combat this confusion and ensure your employees are satisfied, consider briefly discussing the differences between net pay and gross pay during their onboarding process and include it in your employee FAQs.