It’s not easy to dive into the salary structure pool, especially if you’re an employee who isn’t aware of the latest changes on salary and tax. The payroll process can be difficult since several components must be calculated at the same time. Even if it is correctly perceived, the most difficult aspect of an employee’s paycheck is determining the difference between gross and net pay. Though they may appear to be the same, they are vastly different in practice. Moving further, we need to analyze the major difference and perform other calculations.
The most crucial factors in determining an individual’s compensation are gross and net income, and there is a significant disparity between the two. Both represent earned pay components, but the difference arises when taking into account tax and other deductions.
Gross Pay
Gross pay is the most important component of the CTC system. It consists of the sum of one’s basic salary and allowances received by government and organization policies.
Net Pay
Net pay, often known as the employee’s take-home pay, is an important aspect of the salary structure. After statutory and TDS deductions from gross income, the salary remains. EPF, Professional Tax, and ESIC contributions made according to legislative norms and regulations are included in statutory deductions.
What Is the Difference Between Gross and Net Pay?
The total earnings compensated to the individual employee by the employer is commonly referred to as gross pay. It is the amount of money an employee receives before deducting taxes.
At the time of recruitment, the company negotiates the net income subject to post increments, and it is the amount that an employee receives in hand after making all deductions.
While looking at a payslip, the company always states gross income first and lists net income last, providing you with the exact difference between the two. It is always less than the gross salary, which is how you can distinguish both are different.
Why is it important to know the difference between gross and net pay?
The fact that the net salary is always less than the gross salary may bewilder employees. To avoid disputes, the company needs to eliminate this difference.
As an HR professional, calculating the salary for each employee is always a challenge. Furthermore, if you offer the salary without subtracting any taxes, you may be paying them under the table, which is unlawful.
How Do You Calculate Gross Pay for Hourly and Salaried Employees?
Gross pay is the sum of a person’s basic salary, allowances to cover recurring costs, reimbursements, and the annual bonus amount based on their job criteria.
Gross salary = basic salary + allowances (DA + HRA + LTA + others) + bonus + reimbursements
This calculation varies depending on the job description of the employee, such as hourly and salaried employees. Employees paid on an hourly or salary basis may work full-time, part-time, or on a job-sharing basis.
Hourly employees
If you have employees who work on an hourly basis, you can pay them on an hourly pro-rata basis. If the company states that it can pay these employees weekly or biweekly.
Hourly based employees’ gross pay = hourly rate of employee* the number of hours worked.
Example
Suppose an employee’s hourly rate is Rs.100. and they work 8 hours per day. The specific employee’s daily wage is 100*8, which is equal to Rs.800 per day.
Salaried employees
Salary employees’ gross pay is calculated on an annual basis rather than hourly. As a result, it can be weekly, biweekly, or monthly.
Employee gross salary = Annual Salary / Number of pay periods
Example
Assume the employee’s annual salary is Rs.8,000,000 and the organizational pay period is 12 months. The employee’s gross income will be Rs. 8,00,000/12, which equals Rs. 66,666 per month.
How Do You Calculate Employee Net Pay?
Estimating net pay requires knowing the gross pay first and foremost. The calculation of net income includes an employee’s tax liability. These tax liabilities may change on an annual basis, and the company must record them. The formula for calculating net income is provided below.
Net Salary = Gross Salary – Statutory Deductions (EPF, ESIC, Gratuity) – Income Tax (TDS, PT)
Do You Need Help Managing Your Company’s Payroll?
Are you prepared to handle all payroll requirements, including net and gross pay? You must be if you want to run a successful business. You must follow several laws, including keeping a payroll register, issuing the correct payslips, and keeping payroll records for at least three years.
How can you keep up with payroll laws and practical issues?
Sumopayroll is here to assist you. It provides a platform for your company that combines time tracking, payroll, and bank direct deposit services. Sumopayroll allows you to record and report every item for your payroll without any hassle.
