All working professionals must have encountered the terms like gross salary and net salary. Understanding the exact difference between them is absolutely essential to know of one's earnings and financial situation. Once you know what gross pay is, and what distinguishes it from your net pay, you would be able to plan your expenses systematically.
Facts About Gross Payment
The definition of gross payment says that, it is the total amount of salary or wages paid to any employee by the employer before any kind of deductions made.
It is nothing but the total amount offered by the employer for the services being given by the employee in a full year. Your gross pay reflects how much amount is being paid to you by your employer in every pay period.
While trying to understand this concept, you need to be aware of two terms - hourly gross pay and salaried gross pay. For calculating the hourly gross pay, you need to multiply the fixed hourly pay rate with the number of hours served by the employee in the pay period under discussion.
The technique of calculating gross pay for salaried employees of corporations is slightly different. Every employee working in a firm has a fixed total remuneration. If this amount is divided by the total number of pay periods, you will get the salary gross payment.
When some items are deducted from the gross pay, the amount which is left is the net pay or in-hand salary of the employee. The deductions are compulsory and are made from every payment made to the employees.
The taxes to be paid to the government authorities are the most important deductions from the salary. These taxes can include the national taxes, taxes to be paid to the respective states in which the employee works and also the local taxes.
The second major deduction would be that of the health insurance costs as the health insurance cover is provided by the employer. This too will be deducted on a monthly basis.
Social security deductions are also considered while calculating the net income of a person for a year from the gross income. Here is the formula that will help you calculate the net pay.
Net Payment = Gross payment - (social security + tax deductions + state and local taxes).
Taking Financial Decisions Based on Gross and Net Pay
Whenever an employer advertises about job vacancies and mentions the salary which he is offering, it is the gross salary most of the time. So, that is why you get a paycheck of an amount which is little less than the promised amount at the end of the month.
Whenever you consider decisions of opting for a loan or buying anything big, it has to be on the basis of the net income and not the gross salary.
This is because in case of a loan availed, you will have to pay the monthly installments from the net salary. Taking an investment call on the basis of the gross income could be a wrong decision that can stress your finances greatly.
Hoping that this post will help you in proper financial management by understanding the basic difference between gross pay and net pay. All the best, and take smart decisions for a happy future!