WHAT IS NET SALARY: How To Calculate It

WHAT IS NET SALARY: How To Calculate It
WHAT IS NET SALARY: How To Calculate It

Net salary is the employee’s earnings after deducting all deductions.  Mandatory deductions, such as mandatory FICA and Medicare, are automatically withheld from an employee’s earnings. 

Other deductions come in the form of benefits that may be optional.  The employer may offer health insurance, dental and vision insurance, life insurance or a pension fund.  These costs will be deducted from the employee’s gross salary.

What Is Net Salary? 

Net salary is the actual amount credited to the employee’s bank account.  Income tax is based on the employee’s gross salary.

Net wages are the amount of wages left on your pay statement after deductions.  In other words, it’s the actual amount of money you take home.  Because of this, it is also sometimes referred to as “self-pay” (especially in some wage statements).

The salary of the working population of the country is determined on the basis of qualification, level of education and other criteria. 

Even after working for many years, many employees are unable to understand the various components of their salary – gross salary, CTC, net salary and net salary.  Not knowing these details can lead to confusion and frustration.

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How To Calculate Net Salary

When you work as an independent contractor, your taxes are calculated a little differently.  When self-employed, plan to pay about 30-35% of your gross income in taxes.  Taxes include income tax, depending on your tax bracket, as well as self-employment tax. 

Since you are both an employer and an employee when you are self-employed, you are responsible for paying both halves of your Social Security and Medicare (FICA) taxes, which are self-employment taxes.  The current self-employment tax rate is 15.3%.

To calculate your net salary, estimate your net earnings, then subtract that number from your gross income, minus any additional business expenses.

The information provided on the MBO blog does not constitute legal, tax or financial advice.  It does not take into account your specific circumstances, goals, legal and financial situation or needs. 

Before acting on any information on the MBO blog, you should consider the appropriateness of the information in your situation by consulting with your chosen professional advisor.

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How To Calculate Gross Income For Salaried Employees

The salary stated in your employment contract will be your official salary.  You can also calculate your gross income based on your regular pay stubs. 

For example, if you receive $5,000 in gross wages per month from your employer, you can do a simple calculation ($5,000 over 12 months) to get your gross income: $60,000.

However, there is a possibility of receiving other income from your employer, including bonuses.  If you received bonuses in addition to your salary, you will need to include the full amount you received before tax as bonuses when calculating your gross salary.

It’s important to add the gross bonus amount to your gross pay because bonuses are often taxed at a different rate than regular income.

For example, if your employer agrees to pay you $60,000 a year without bonuses, that would be your gross income. 

However, if you receive a $5,000 bonus this year, it will be taxed at a flat rate of 22%, while your regular salary will either be taxed at a lower or higher rate, depending on how you file your taxes.  So your gross salary would be $65,000 including bonuses.

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How To Calculate Gross Income For Wage Employees

If you are paid hourly and don’t know how many hours you will work for the year, it may be easiest to calculate your gross income at the end of the year.  When you get your last pay stub, you can find all the gross income you earned for the year.

However, if you receive regular and guaranteed working hours from your employer, you can easily calculate your weekly, monthly or yearly gross income.  Simply multiply the number of hours you get each week by the total amount you earn per hour.

For example, if you earn $18 an hour with a guaranteed 35 hours a week, your weekly salary would be $630, your monthly income would be $2,520, and your annual salary would be $32,760.

If your employer doesn’t provide paid time off, remember that your total pay will decrease if you take time off.  If you get a raise at any point during the year, adjust your calculation to account for the increase in hourly pay.

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Gross Salary Vs. Net Salary

Your gross pay will often appear as the highest number you see on your pay stub.  This is a reflection of the total amount your employer pays you based on your agreed salary or hourly rate. 

For example, if your employer agreed to pay you $15 an hour and you work 30 hours during the pay period, your salary would be $450.

Net pay is the final amount of money you will receive after all taxes and deductions have been deducted.  Net pay is the amount actually credited to your bank account, or the value of your salary.

In most cases, your net pay appears in larger type on your pay slip or pay statement and is often bolded to appear darker so you can easily distinguish it from your gross pay.

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Conclusion

If you have previously worked as a W-2 employee, you may be familiar with the terms net wages and gross wages.  Gross pay is the amount you earn before taxes and deductions.  This is usually the largest number you will see on your payment receipt. 

On the other hand, net pay is the amount you earn after deductions are taken out.  Deductions may include federal and state taxes, Social Security and Medicare taxes (FICA), or health insurance costs. Net salary is another term you may hear for net salary.  You can use both interchangeably.

What Is Net Salary FAQs

How Can I Use Net Salary And Gross Salary For Tax Declaration?

When it comes to your tax return, you need to know both your gross and net income.  The number you use will depend on the form you are submitting.  For example, if someone asks for your income, you should include your gross salary. 

A lender, on the other hand, would like to know your net charge, as this is the amount you will actually have in your bank account to use and repay the loan. 

It’s also important to note that the amount of money you can get after you file your tax return will depend on your deductions.  For example, if you claim more exemptions, there’s a chance you’ll owe more money after filing.

What Is The Formula To Calculate Cost To Company (CTC)?

Cost to Company (CTC) includes all itemized expenses incurred by the employee, including the employer’s contribution to the provident fund.  CTC can be calculated using the following formula: Expenses to Company = Gross Salary + PF + Gratuity.

Is Net Salary Monthly?

Net income is the amount of a person’s salary that remains after the employer withholds taxes and deductions.  Net monthly income refers to the monthly pay a person takes home.  Net salary = gross salary – all deductions like income tax, pension, professional tax etc.  Net salary is also called self-pay.

REFERENCES

  • mbopartners.com – What is Net Salary: Definition and How to Calculate
  • indeed.com – Gross Pay vs. Net Pay: Definitions and Examples

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