When it comes to payroll management, organizations and HR managers need to understand two important terms: gross pay and net pay. What are the differences and how are they calculated? Having an all-inclusive payroll solution like PeopleCentral can automate the payroll administration process and help compute gross wages and net wages.
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What is Gross Wage?
Gross wage is the total amount of salary that your employees get after adding all allowances and benefits, but before any deductions are made. It is the cost to the company (CTC) and includes the following:
- Basic salary
- Special allowances
- House rent allowance
- Medical allowance
- Leave travel allowance
- Conveyance allowance
- Educational allowance, etc.
Other components of gross salary include overtime payment, salary arrears, fee or remuneration, cash rewards, and others.
What is Net Wage?
Net wage is the amount that your employees receive after all deductions are made. To put it simply, it is the salary that an employee takes home.
The following table will help you understand the differences between gross wage and net wage:
|Gross Salary||Net Salary|
|It is the amount of salary that includes all allowances and benefits but before deductions are made||It is the amount of salary that an employee actually takes home|
|Gross wage includes benefits to an employee such as medical allowance, conveyance, HRA, and others||Net Wage = Gross Wage – All types of deductions like professional tax, pension, income tax, etc.|
|Gross salary is known as the Cost to Company (CTC)||Net salary is also referred to as Take-Home salary|
How is Gross Salary & Net Salary Calculated?
Gross salary can be calculated in different facets – from per month to per year. To compute manually, you will need to understand your pay frequency, i.e., weekly, bi-weekly, semi-monthly or monthly. For hourly wages, you need to calculate the total amount estimated for the year.
Annual Pay / Pay Frequency = Your Gross Pay
Net salary is calculated by deducting taxes and other adjustments from the gross salary. These would include federal withholdings, medical plans, social security, and taxes.
Calculating gross pay and net salary can be difficult, particularly because there are numerous components that need to be computed here. Thanks to PeopleCentral’s fully automated payroll administration system that seamlessly computes gross pay and net pay, helping save more time and costs.