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, the major difference as well as other calculations are required.
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 pay components earned, but the difference arises when tax and other deductions are taken into account.
The 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, 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 received by an employee before taxes are deducted.
While net income is what an employee receives in hand after the whole deduction is made, as negotiated at the time of recruitment (subject to post increments).
While looking at a payslip, gross income is always stated first, and net income is listed last, giving you 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?
Employees may be bewildered by the fact that the net salary is always less than the gross salary. To avoid disputes, it is necessary to eliminate them.
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?
The 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.
If you have employees who work on an hourly basis, they must be paid on an hourly pro-rata basis. According to the company, these employees can be paid weekly or biweekly.
Hourly based employees’ gross pay = hourly rate of employee* the number of hours worked.
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.
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
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?
First and foremost, knowledge of gross pay is required for estimating net pay. An employee’s tax liability is included in the calculation of net income. These tax liabilities may change on an annual basis and must be recorded. 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.