Gross Vs. Net Pay: What Is the Difference?

Salaries are often considered a main selling point for talent recruitment. Companies with a clear vision, great business practices, a variety of benefits, and high compensation will have an amazing pool of candidates from which to fill their positions. But what does a $95,000 salary mean in terms of take-home pay? The answers vary by country.

Your paychecks refer to both gross and net pay, but only one reflects the tangible money you can deposit into your bank account. In the US, the UK, and in Europe, the difference of gross versus net pay is based on a variety of factors. Let’s break down what gross and net pay mean, and the greatest differences between the two.

What do gross and net pay mean for a specific pay period? Which represents a true salary? How do deductions factor into a salary?

What is Gross Pay?

Essentially, gross pay is the biweekly or monthly pay period cumulative pay you earn. Cumulatively, it equals the salary offered with a position. Gross pay is listed on a paycheck and reflects the money earned before taxes and any other fees are deducted. 

Human resources professionals can determine what salaries are allowed in your budget, and what would be commensurate compensation for specific positions. 

If your HR provider has consulted you and offered a job to a final candidate and the candidate accepts, they will sign an employment contract with a listed salary. For example, if someone accepts an offer for $85,000 per year, this is considered their gross pay.

What is Net Pay?

Net pay represents the money you actually earn on your paycheck. In the US, deductions like federal and state taxes, social security, and 401k are taken directly from your paycheck. In the UK, benefits like National Insurance payments are made from your gross pay amount, and are not included in the net paycheck you take home.

In European countries (including countries in the EU), the amount of net pay you receive depends on the tax rates and laws in place. Payroll taxes may include educational and training costs, national taxes, and social contributions.

In some EU countries, you may take home a greater net pay (on the same gross pay) after deductions. For example, in Denmark, income tax rates are 55.9%, while in Hungary, the taxes on income stand at 15%. Thus, you may earn the same gross pay in both countries, but you’ll take home far less net pay in Denmark.

Which type of pay reflects your true salary?

This gets a bit murky — both gross and net pay reflect your true salary. The deductions taken from your gross pay go toward your mandated taxes and pay into benefits like health insurance and retirement funds, Thus, while you may not have control over that portion of your salary, it still pours contributions into benefit programs for you.

However, your net pay is the money that you control: you can direct how it’s spent and it’s reflected in your bank account. On HR job postings that include salary, the annual pay listed equals your gross pay per paycheck added up. When salaries are discussed in public forums, etc., the amounts refer to cumulative gross pay and not to net pay.

How to calculate gross vs. net pay

You can calculate gross vs net pay based on the tax and other deduction laws of the region. It’s important to utilize HR professionals with a thorough understanding of  income tax and deductions in the countries where you operate.

For example, if your business is based in the US and you’re looking to expand to France, the salary and deductions for an identical position will be extremely different in each country.

Ways to calculate gross vs net pay include:

  • Dividing annual salary into pay periods. This should equal the gross pay listed on each paycheck.
  • For those who earn hourly wages rather than salaried wages, the amount of hours worked multiplied by the hourly rate will equal gross pay.
  • Determine the mandated deductions on each paycheck and subtract these from the gross pay total. This number equals the net pay for a determined pay period.

How does gross vs. net pay vary by country?

Again, gross vs net pay is determined by the income tax laws and standard payroll deductions in each country. However, generally speaking, there are certain basic standards that vary in vital ways. If you’re a US, UK, or European-based business owner looking to expand your operations into another country, you should have a basic knowledge of these laws.  

In the US, standard deductions include:

  • State taxes
  • Federal taxes
  • Social Security
  • Wage Garnishments (For instance, if an employee owes back child support or taxes, they may have a court-mandated wage garnishment)

In the UK, standard paycheck deductions include:

In the EU, standard paycheck deductions may include:

  • European tax (but not national taxation)
  • Pension
  • Health Insurance
  • Unemployment Insurance
  • Accident coverage

The human resources management team you hire should have a thorough understanding of these laws, and can take care of detailed job postings and salary determinations so that you can concentrate on growing your company.

How can Europe HR Solutions help?

When it comes to gross vs net pay, it’s important to understand what the difference is in each country where you want to do business. You may feel overwhelmed by learning the payroll variances in foreign nations, and if you don’t delegate this responsibility, it can hinder your larger goals.

At Europe HR Solutions, our team of human resources professionals can take care of the responsibilities of your salary and job postings. Based in Belgium, we have assisted many US and UK-based companies (both large and small) to ensure they maintain legal compliance as they grow in Europe. We’ve supported and helped many international companies take their businesses to the next level.  

Contact us with your HR outsourcing needs, and let us work alongside you to help ensure your successful growth.

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