What Is the Difference Between Gross and Net Salary?
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Whether you earn an annual salary or an hourly wage, you might notice two different numbers on your paycheck. Companies refer to these two numbers as net salary and gross salary. Familiarising yourself with these two numbers can better equip you to negotiate salaries with potential employers effectively. In this article, we discuss the difference between gross and net salary, provide the possible deductions from your gross salary and show you how to calculate gross salary.
What is the difference between gross and net salary?
To determine the difference between gross and net salary, it's important to define each type:
Gross salary refers to the full payment you receive before your employer removes mandatory contributions and tax deductions. This amount is equivalent to your base salary plus all allowances and benefits, such as medical insurance, overtime pay, special allowances, housing allowance and travel allowance. Your gross salary often appears as the highest number on your pay statement. It's the reflection of the total amount the company pays you based on your contract. For instance, if the company agreed to pay you $40 per hour and you work 35 hours during a pay period, your gross salary is $1,400.
Net salary is the final amount of money that your employer pays you after they subtract all deductions and taxes. Net salary is the actual amount deposited into your bank account or the value of your paycheck. For example, if you normally earn $1,400 and your employer deducts $400, then your gross salary is $1,400 and your net pay is $1,000. In many cases, your net salary appears in bold on your pay statement or paycheck so that you can easily distinguish it from your gross salary.
Deductions from gross salary
Here are the possible deductions from your gross salary:
A payroll tax refers to the percentage withheld from your salary by your employer, who pays it to the government on your behalf. The amount of your tax varies depending on several factors, including your salary, bonuses or tips. Your employer may directly deduct your payroll tax from your earnings and pay it to the Inland Revenue Department.
Vision, dental and medical health insurance are voluntary deductions that your employer may take out of your gross salary, assuming that you are taking part in their health insurance programme. Your employer may spread the payments out over the course of your employment and deduct them every payroll or once a month. Premiums aren't the only expense you may incur to receive medical care. It may be necessary to pay out-of-pocket expenses depending on the amount and type of care you receive. These include deductibles, copays and coinsurance.
Life insurance is a contract in which your insurance provider, in exchange for a premium, guarantees payment to your beneficiaries when you die. This deduction is possible if your employer offers life insurance coverage and you have signed up to get basic term life insurance coverage through your employer. Your employer often deducts the premiums associated with your coverage from your salary, unless your employer pays the premiums on your behalf.
In Hong Kong, the main type of pension scheme is the Mandatory Provident Fund (MPF) scheme. Subject to exemptions, the MPF system covers all employees and self-employed individuals aged between 18 and 64. The MPF requires you and your employer to make regular mandatory contributions of 5% of your relevant salary, subject to the maximum and minimum relevant income levels. If you're a monthly paid professional, your current maximum and minimum relevant income levels are $30,000 and $7,000, respectively.
This type of plan can work as a great incentive to motivate professionals, as it can give them an opportunity to take part in the financial success of their employers. A profit-sharing plan may not include a component of your contribution. Also, you may have a limit to the amount you can contribute in a profit-sharing plan.
Your employer may provide you with long-term and short-term disability coverage. This coverage allows you to receive a percentage of your salary in case of an accident that leaves you temporarily or permanently disabled. Your employer may use this type of deduction to collect your premiums towards your disability insurance.
How to calculate your gross salary
To calculate your gross salary, you can refer to your most recent salary statement. How you calculate gross salary may vary depending on whether you receive a salary or hourly wage.
Calculating gross income for salaried professionals
Here are the steps to calculate gross income for salaried professionals:
1. Determine your gross salary
The salary included in your employment contract is your official gross salary. You may also calculate your gross income based on your regular pay statements. For example, if you receive $5,000 per month in gross salary from your employer, you can perform a simple calculation ($5,000 x 12 months) to get your gross income, $60,000.
2. Find out your bonuses
There's a chance you could earn other income from your employer, including bonuses. If you received bonuses in addition to your salary, it's important to include the full amount you earned before taxes in bonuses when you compute your gross salary amount. It's important to add the gross bonus amount to your gross salary because the government often tax bonuses.
3. Calculate for gross salary
If you earn $300,000 a year, the government taxes you pay on this amount are $24,478. This means that your net salary is $22,960 per month or $275,522 per year. Your median tax rate is 8.2%, while your marginal tax rate is 18.2%. The marginal tax rate means that the government taxes your immediate additional income at this rate.
For example, if your salary increases by $100, your tax would be $18.07. Thus, your net salary would only increase by $81.93. A $1,000 bonus can provide you with an extra $819 net income, while a $5,000 may generate an additional $4,097 of net income.
Calculating gross salary for wage professionals
If you earn hourly wages and you aren't sure how many hours you work annually, it may be easiest to calculate your gross income at the end of the year. Once you receive your last pay statement, you can locate the entire gross earnings you made during that year. However, if you receive regular and guaranteed hours from your employer, you can calculate your weekly, monthly or yearly gross income easily. Simply multiply the number of hours you receive each week by the total amount you earn in an hour.
For example, if you earn $39 per hour with a guaranteed 35 hours of work per week, your gross weekly wage is $1,365, while your gross monthly salary is $5,460. Also, your gross annual salary is $65,520. If your employer doesn't provide paid time off, remember that your gross salary may decline if you take any days off. If you receive a raise at any point in the year, adjust your calculation to account for the increase in hourly pay.
How to determine net salary
You can calculate your net salary in two ways. One way is to just check your salary statement. Employers often list net salary as an item on salary statements. Another way to determine your net salary is to calculate it. Here are the steps you can take to calculate your net salary:
1. Determine your gross salary
To determine how much net salary you receive, it's important to know your gross salary. Most professionals know their gross salary, but in order to determine your monthly gross salary, you can divide this amount by 12. If you don't know your gross salary, consider referring to your salary statement or consult with your manager.
2. Calculate your deductions
It's important to determine the deductions your employer may take out of your gross salary. Your employer often lists your monthly deductions on your pay statement. Add your mandatory and voluntary deductions together to reach a sum of your total deductions per month.
3. Calculate for net salary
Once you have determined your gross salary and the sum of your deductions, determining your net salary is relatively easy. To do this, just subtract your deductions from your gross salary. Consider using this formula to calculate your net salary:
Net salary = gross pay - deductions
For instance, if your annual salary is $80,000. This amount is your gross salary. Each month, your gross salary is about $6,667. If your deductions each month amount to $1,100, you can simply subtract that amount from your gross salary of $6,667. This would give you a monthly net salary of $5,567.
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