Understanding how to stay on top of your employee’s payroll is essential for successfully operating a business. You need to ensure that your payroll process is in line with local labor and tax laws and that your employees receive their salaries on time and in the correct amount every month. Knowing the difference between gross pay and net pay is therefore fundamental to operating an efficient payroll process.
In this article, we define the two terms and how to calculate them. We also list standard payroll deductions so that you can understand the essentials of withholding taxes when working at home or overseas.
What are Gross Pay and Net Pay?
Gross pay is the total amount an employee earns in a pay period before any tax or payroll deductions. Gross pay includes overtime pay, bonuses, commissions, reimbursements, etc.
Net pay is an employee’s final salary after all deductions have been made. Deductions may include social security, health insurance, income tax, etc.
Net pay is also referred to as take-home pay.
How to Calculate Gross Pay
For hourly workers, simply multiply their hourly wage by the number of hours they have worked in a pay period.
Example: Jane works 40 hours a week for $15 an hour. Her gross pay per week is $15×40= $600. This amount should also include any overtime hours worked at the agreed-upon overtime rate.
For salaried workers, divide their total annual salary by the number of pay periods. There are four types of pay periods: weekly, biweekly, semi-monthly, and monthly.
Example: Jane receives her salary monthly, meaning she has 12 pay periods. If her annual salary is $210,00, this amount is divided by 12, so she receives $17,500 per pay period.
How to Calculate Net Pay
To calculate an employee’s final net pay, take gross pay and subtract the correct amount for each deduction. Mandatory payroll deductions will differ depending on what country you are based in and the type of worker. For example, employers do not organize tax payments for independent contractors.
For this reason, it’s vital that you know what tax and social security deductions employers must withhold for their employees.
There may also be voluntary deductions, such as certain types of health care, pension, and childcare. These may be deducted pre- or post-tax, according to local law.
An employee’s paycheck must include all of the following:
- gross wages
- a clear listing of all deductions
- total net pay
Common Types of Payroll Deductions
While payroll laws differ from country to country, and sometimes even region to region, some general deductions are found in many countries. These include:
- Medical Insurance
- Income Tax (both regional and national)
- Pension
- Social Security
- Unemployment Insurance
- Accident Insurance
- Court-ordered wage garnishment
Each country has different required payroll deductions. Also, collective bargaining agreements (CBA) and trade unions may have mandatory deductions depending on the industry. In general, employers should meet the basic requirements of both national labor regulations and CBAs to be safe.
For example, in China, maternity benefits are included in social security, while in Spain, there is a percentage for vocational training. In the US, FICA taxes combine both social security and Medicare.
Suppose you have branches of your company in different countries. In that case, you will need to apply local regulations to the employees in those countries. You also need to keep track of new laws or updates to regulations that affect your overseas branches. Any mistakes or errors made in deducting payroll taxes can result in having to pay high fees and fines.
Net Pay in the US: An Example
Calculating net pay in the US can be particularly complex due to local, state, and federal law differences. Local and state tax percentages may vary, and other pre-tax deductions, like health insurance premiums, life insurance, etc., are also essential to keep track of.
Example: John works in Willmar, Minnesota. His gross salary is $900,000, and his salary is subject to state income tax, FICA, and Federal income tax.
FICA is 7.65%.
State tax is 9.20%
Federal tax is 32.49%
After these deductions, John’s net pay would be $452,790.
Improve Your Payroll Process with INS Global
Managing the payroll process can be complicated and time-consuming. Any miscalculations can be costly in tome, money, and reputation. Furthermore, failing to deliver salaries on time can damage your employees’ trust and confidence in the company. This then leads to higher turnover and greater general instability.
That’s why partnering with a professional provider like INS Global makes your payroll process easier, faster, and more streamlined.
We have expert legal teams to keep track of any new laws passed and assist you with implementing necessary changes quickly and correctly. Our counselors are always available to give personalized advice for your specific situation.
We offer PEO (Professional Employer Organization) and EOR (Employer of Record) solutions in more than 100 countries worldwide so that you can have the quality services you need no matter where you’re expanding.
INS Global’s payroll outsourcing services are available to companies of all sizes. We want to improve the way your business operates and make your global expansion goals a reality.
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