Gross Salary vs Net Salary

Difference Between Gross Salary and Net Salary

Gross salary is the salary before income tax deduction (Fed and state taxes), Social Security (FICA Tax – payroll tax), Health care insurance while net salary is a take-home salary which is credited in employee’s bank account.

Gross Salary is the amount that is paid before the deduction of any taxes or any other deductions and is also inclusive of all the bonuses, shift allowance, holiday payHoliday PayHoliday pay is a bonus for employees as they get paid with standard wages even for the day off, such as Christmas or Thanksgiving. It isn't necessary, but some employers offer it as a reward for their employee's contribution to the company.read more, overtime pay, and other differentials. It also excludes the retirement benefits (e.g., 401(k) accounts) along with taxes deducted at source. Benefits (such as group health insurance and another kind of non-cash components that are part of salary are not counted as part of gross salary);

Gross-Salary-vs-Net-Salary

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Net Salary, commonly renowned as Take-Home Salary and is the income that the employee will take home once tax, which is deducted at source and other such deductions such as retirement benefits, as mentioned earlier. Net Salary is Gross salary less Income Tax deductions, which means, Net Salary Income Formula = Gross Salary – Income Tax Deducted at Source – Retirement Benefits.

Below salary slip will help us identify the basic difference between gross vs. net salary.

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Gross Salary vs. Net Salary Infographics

Let’s see the top differences between gross vs. net salary along with infographics.

Gross-Salary-vs-Net-Salary-info

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Source: Gross Salary vs Net Salary (wallstreetmojo.com)

Key Differences

  • Whenever any employee applies for any loan or to check credit eligibility, Net Salary is taken into consideration. However, Gross Salary is taken into consideration, in certain circumstances, like for calculating the Bonus of employee or Insurance requirement.
  • Also, one can change its Net pay or take-home salary figure, and that could even vary monthly. The employee has the option to reduce the amount of income tax by following the rules. E.g., if someone invests in insurance, then he or she will be eligible for deductions under the income tax act, and he can increase the net payNet PayEmployees' net pay, often known as take-home pay, is their salary after all deductions.read more in hand. Further Gross salary figure does not change as that is fixed and determined by the company and is mentioned in the offer letter of the employee, but yes, that changes only after receiving annual hikes.
  •  For applying for credit cards as well, Net salary figure is considered, and based on that company decides the credit card limit. The gross salary is the one that one cannot expect to receive in their bank account as taxes or retirement benefits are bound to be there.

Gross vs. Net Salary Comparative Table

BasisGross SalaryNet Salary
DefinitionGross Salary is the income that an employee gets in the form of CTC before considering retirement benefits (e.g., 401(k) benefits), Income Tax deduction.Net Salary is the actual take away home salary that an employee gets in its bank account.
ExclusionsRetirement Benefits (e.g., 401(k) benefits), Income Tax, which deducts at source, Shift Allowance, Free Meals if any.This includes everything and deducts all the taxes and other retirement benefits.
ExamplesThis will mostly compromise of Direct Benefits and other indirect benefits as well:
• DIRECT
1) Basic Salary
2) Dearness Allowance (DA)
3) Medical Assistance
4) Vehicle Allowance
5) Mobile Allowance
6) Internet Allowance
• INDIRECT
1) Interest-Free Loans
2) Subsidized Meals
3) Office Space Rent
Net Salary will include everything but only after the following deductions, which are taxes and retirement benefits.
1) 401(k)retirement benefits
2) 403(b) benefits
3) Income Tax deducted at source (Federal taxes)
4) State Taxes
5) Social Security
6) Any Health Insurance premium

Conclusion

So, whenever an employee gets an offer letter from the company one needs to consider all the factors mentioned above as if they ignore those figures of retirement benefits and if those form a major part of their CTC then their Net salary or take-home salary will come less to what they would expect.

For example, Mr. X got an offer from ABC company wherein the offer letter it mentioned that they would pay 9,00,000/- as CTC which included 90,000 as Medicare and 90,000 as 401(k) contributions401(k) ContributionsA 401(k) Contribution Calculator can help employees figure out how much they will contribute and how much their employer will contribute, depending on the limits. It is a subset of 401(k) in which we first compute the employee contribution amount, which cannot exceed $19,000, and then we calculate the employer contribution amount, which is likewise subject to limits set by the individual's company.read more then the employee needs to consider that he would receive in-hand salary by dividing (9,00,000 less Medicare less 90,000 for 401(k) contributions) / 12 and not 9,00,000 / 12 assuming no federal taxes.

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