When it comes to payroll processing, both the HR team and employees need to understand the difference between gross vs net. This is essential because this way employees are aware of how much money they make. However, differentiating between gross vs net may be complicated for those that are not familiar with the terms.
In this article, we are going to explain several aspects of gross vs net income. Furthermore, you are going to understand what is gross pay, what is net pay, and the main difference between them.
- Do you know what gross pay is?
- How is gross pay calculated
- What is net pay?
- Understanding aspects that affect net pay
- See the difference between gross and net pay
- Process to calculate net pay
1. Do you know what gross pay is?
Whenever an employer hires an employee, it is necessary to provide an employment contract. It contains all the information about employment, such as wages, termination terms, and much more.
In this regard, an employer must provide a great job offer to the employees. This way, the company can have a strong workforce.
Once the company hires employees, it is necessary to set up a payroll team. In this regard, the company may decide between outsourcing payroll vs in-house.
In any case, the payroll team needs to know how to calculate gross vs net. Also, employees must be aware of their gross income and net income.
1.1 What is gross pay?
Gross pay is the wages the employee earns before any payroll deductions and taxes. So, in the case of employees who earn minimum wage, the gross pay would be that amount.
For example, if an employee earns AED 10,000 per month, then it means he or she will earn AED 120,000 per month in gross pay.
So, between net vs gross, employers use the gross pay when discussing compensation with employees.
And, in the case of hourly-paid employees, the gross pay is the hourly wage agreed upon.
Thus, when it comes to paying international employees, it is important to explain the terms to them.
2. How is gross pay calculated
Since one of the main differences between gross vs net is how they are calculated, it is important to understand it.
So, when it comes to what is gross income and how to calculate it, the method depends on how the employee is paid.
Thus, to obtain gross pay youby the pay periods that are in a year. Here we have the pay periods for each pay schedule, so you can make a great payroll checklist:
- Weekly paid employees: 52 pay periods.
- Bi-weekly paid employees: 26 pay periods.
- Semi-monthly paid employees: 24 pay periods.
- Monthly paid employees: 12 pay periods.
So, if an employee earns AED 120,000 per year, with a monthly payment, the gross pay is AED 10,000.
Similarly, if a worker is paid AED 56,966 per year and the payment schedule is weekly, then the gross pay is AED 1,092.5.
When it comes to effective payroll processing, it is important to understand the calculation of gross vs net.
3. What is net pay?
Once you know what gross pay is, you have to understand what net pay is to see the difference between gross vs net.
Net pay refers to the final amount of money the employee will receive after taxes and deductions.
Thus, is the amount the worker receives in his or her bank account, or the value of the paycheck. Payroll teams need to know how to calculate it to prevent errors and ensure accurate data.
Therefore, the net pay is the compensation the employee takes home. This is an aspect that confuses many workers since they believe that the gross income is what they receive in their bank accounts.
For this reason, an employee needs to be aware of the deductions, withholdings, and UAE tax system, so they can know how much money to expect.
So, to understand the net vs gross income it is important to see the aspects that affect net pay.
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4. Understanding aspects that affect net pay
As you may see, there is a difference between gross vs net pay. The main difference between gross income vs net income is that the former will always be larger than the latter.
This is because your gross income does not include any deductions. Whereas the net income is affected by deductions, some may be mandatory and others voluntary.
4.1 Common deductions
Thus, some of the aspects that affect your net pay are the following:
- Taxes: taxes are mandatory and follow the government’s taxation system. Some of the taxes may be federal, state and local.
- Social security: it will be deducted from your pay a percentage that corresponds with the social security contribution rate. This is because employee contributions must be deducted from the payment by the employer.
- Retirement contributions: the money that goes into your pension is deducted as a percentage of your gross salary. In some countries, the money goes to the state pensions and in others to a private company pension. In other countries is known as retirement savings.
- Health insurance: Some employers offer health insurance as part of employee benefits. Thus, it is deducted from the salary. The employee should pay the premium for health insurance but the amount depends on the country, the industry, and the health insurance scheme.
In some cases, the employer may make additional voluntary deductions. For example, some can be for equipment and uniforms that are required to perform your job, and in other cases, it may be union dues.
They are called voluntary because they are not federally mandated. However, you do not have the option to opt out of them.
This is one of the reasons why many companies evaluate the pros and cons of outsourcing payroll since this way is easier to handle the difference between gross vs net.
5. See the difference between gross and net pay
Once you know the gross wages meaning and the net income, it is easier to see the difference between them.
Understanding how to calculate gross vs net is important for ensuring your payroll controls and legal requirements are in place.
For this reason, you need to be clear with the net and gross earnings meaning:
- Gross pay: the amount of money you earn before any deduction
- Net pay: the amount of money you get after all deductions. It is the actual amount in the paycheck.
It is worth noting that whenever a job is advertised, the employer tends to offer a salary but it is the gross pay.
Therefore, an employee is not going to receive that amount in his or her paycheck. This is because it excludes all benefits and deductions.
So, the net pay is what actually constitutes the income of an employee. In this regard, it is helpful for employees to know which deductions affect the industry where he works and which are mandatory as well as their percentages.
Knowing how to calculate net pay is crucial. Nonetheless, by knowing how to calculate it, you will see the difference between net income vs gross income.
Payroll teams must be aware of the deductions that affect the UAE to make accurate calculations.
6. Process to calculate net pay
Knowing how to calculate net pay properly will ensure the company has a successful payroll implementation.
For this reason, understanding the difference between calculating gross pay vs net pay is crucial.
Companies implement different procedures, but generally, to calculate net pay employers carry out the following process:
- First, it is necessary to calculate the gross pay. To do this, you can multiply the hourly rate by the total hours worked. Or, divide the salary by the number of pay periods. For example, if you earn AED 60,000 per year, divide it by 12 and thus you earn AED 5,000 per month. It is also worth noting you need to add the gross bonus amount to your gross pay if you receive any.
- Once you have the gross pay, determine the deductions you have to make. You need to know the percentage rate to deduct for any mandatory and voluntary deductions.
- The next step will be to withhold all taxes. Keep in mind that some deductions are pre-tax and others are post-tax
- Once you have all the deductions, you have to subtract them from the gross pay to obtain the net pay.
The best part is that all of this information is on the pay slip. But, as you can see, employers have to know which deductions to make. For example, in the UAE, there is no individual income tax, but employers have to withhold the pension contribution for local workers.
If you want to learn more about payroll terms and processing, we invite you to visit our blog. Here we have all the information you need to know such as new penalties for late payment of UAE salaries or understanding payroll accounting.