What is Gross Pay?

Gross pay is the total amount of money an employee earns before any deductions or withholdings are subtracted from their paycheck. It includes all forms of compensation, such as:

1. Regular hourly wages or salary
2. Overtime pay
3. Bonuses
4. Commissions
5. Tips
6. Vacation pay
7. Sick pay
8. Holiday pay

For salaried employees, gross pay is typically a fixed amount per pay period, while for hourly employees, it varies based on the number of hours worked.

Gross pay does not represent the actual amount of money an employee will receive in their paycheck, as it does not account for deductions such as taxes, insurance premiums, retirement contributions, and other withholdings. Gross pay serves as the starting point for calculating an employee's net pay or take-home pay.

What is Net Pay?

Net pay, also known as take-home pay, is the amount of money an employee receives after all required deductions and withholdings have been subtracted from their gross pay. It is the actual amount of money that the employee takes home and can use for their personal expenses.

Mandatory deductions are those required by law and may include:

1. Income taxes (national, regional, or local, depending on the country)
2. Social Security contributions or similar social insurance programs
3. Healthcare contributions (if applicable)
4. Pension or retirement fund contributions (if mandated by law)

Voluntary deductions are those that the employee has agreed to have withheld from their paycheck, which may include:

1. Additional retirement plan contributions
2. Private health insurance premiums
3. Life insurance premiums
4. Disability insurance premiums
5. Union dues
6. Charitable donations

The specific types of deductions and their amounts will vary depending on the country, region, and the individual employee's circumstances. Some countries may have additional mandatory deductions unique to their jurisdiction, such as unemployment insurance or housing funds.

For example, In Indonesia, employees contribute to the Jaminan Sosial Tenaga Kerja (Jamsostek), which includes programs for retirement savings, workplace accident insurance, death insurance, and healthcare. Malaysia has a unique deduction related to religious obligations for Muslim employees called Zakat. Some employers in Malaysia offer the option to deduct Zakat contributions directly from the employee's salary, making it more convenient for them to fulfill their religious obligations.

Employers must calculate net pay in accordance with the applicable laws and regulations in the country where the employee works. This can be complicated if you have or plan to hire employees in different countries. That's where a global payroll platform like Thera can help. Thera ensures compliance with various tax laws and employment regulations across multiple countries.

How to calculate gross pay for an hourly employee?

To calculate gross pay for an hourly employee, you need to consider their base hourly rate, the number of regular hours worked, any overtime hours worked, bonus promised, etc.

Let's take the example of Maria who works as a junior designer at an advertising agency. Her base hourly rate is $18 per hour. In a given week, she worked 45 hours, including 8 hours on a public holiday. The company pays overtime at 1.5 times the regular rate for hours worked over 40 in a week, and they pay 2 times the regular rate for hours worked on public holidays. Additionally, Maria earned a $100 performance bonus for meeting her production targets this week.

To calculate Maria's gross pay, we need to:

1. Calculate her regular pay for the first 40 hours
2. Calculate her overtime pay for the additional 5 hours
3. Calculate her public holiday pay for the 8 hours worked on the holiday
4. Add her regular pay, overtime pay, public holiday pay, and performance bonus together

Step 1: Regular Pay Regular hours worked × Base hourly rate = Regular pay (40 hours - 8 holiday hours) × $18 = 32 hours × $18 = $576

Step 2: Overtime Pay Overtime hours worked × (Base hourly rate × Overtime multiplier) = Overtime pay (5 hours - 3 holiday overtime hours) × ($18 × 1.5) = 2 hours × $27 = $54

Step 3: Public Holiday Pay Holiday hours worked × (Base hourly rate × Holiday pay multiplier) = Holiday pay 8 hours × ($18 × 2) = 8 hours × $36 = $288

Step 4: Total Gross Pay Regular pay + Overtime pay + Public holiday pay + Performance bonus = Total gross pay $576 + $54 + $288 + $100 = $1,018

Maria's total gross pay for the week is $1,018, which includes her regular pay for 32 hours, overtime pay for 2 hours, public holiday pay for 8 hours, and her performance bonus.

This example demonstrates how various factors, such as different pay rates for overtime and holiday work, as well as performance bonuses, can impact an hourly employee's gross pay.

How to calculate gross pay for a salaried employee?

To calculate gross pay for a salaried employee, you need to know their annual salary and the frequency of their pay periods (e.g., weekly, bi-weekly, semi-monthly, or monthly). You can then determine their gross pay for each pay period by dividing their annual salary by the number of pay periods in a year.

Let's consider an example with a few additional elements to make it more realistic:

Example: John is a sales manager at a global firm with an annual salary of $75,000. He is paid semi-monthly (twice a month), which means there are 24 pay periods in a year. John also receives a 5% commission on his monthly sales, which totaled $50,000 for the current month. Additionally, he received a $2,000 annual performance bonus that is paid out in the current pay period.

To calculate John's gross pay for this pay period, we need to:

1. Calculate his base salary for the pay period
2. Calculate his commission for the pay period
3. Calculate the portion of his annual bonus paid in this pay period
4. Add his base salary, commission, and bonus together

Step 1: Base Salary Annual salary ÷ Number of pay periods per year = Base salary per pay period $75,000 ÷ 24 = $3,125

Step 2: Commission Monthly sales × Commission rate = Monthly commission $50,000 × 5% = $2,500 Monthly commission ÷ 2 (since he is paid semi-monthly) = Commission per pay period $2,500 ÷ 2 = $1,250

Step 3: Annual Bonus Annual bonus ÷ Number of pay periods per year = Bonus per pay period $2,000 ÷ 24 = $83.33

Step 4: Total Gross Pay Base salary + Commission + Bonus = Total gross pay per pay period $3,125 + $1,250 + $83.33 = $4,458.33

In this scenario, John's total gross pay for this semi-monthly pay period is $4,458.33, which includes his base salary, sales commission, and a portion of his annual performance bonus.

When calculating net pay for your employees, it's essential to follow a step-by-step process to ensure accuracy and compliance, especially when dealing with a global workforce. Here's a comprehensive guide on how to calculate net pay for your international employees:

Determine Gross Pay

The first step in calculating net pay is to determine your employee's gross pay. This includes all forms of compensation, such as base salary, hourly wages, overtime pay, commissions, and bonuses. Be sure to consider any country-specific regulations regarding minimum wage, overtime, or other compensation requirements.

Gather Necessary Tax Information

Before calculating deductions, you'll need to gather the necessary tax information for each country where your employees are located. This may include:

• National and regional tax rates and brackets
• Social Security or pension contribution rates
• Employee tax forms or declarations (e.g., W-4 in the U.S., TD1 in Canada, or IR330 in New Zealand)
• Any country-specific tax exemptions, credits, or deductions

Calculate Mandatory Deductions

Next, calculate all mandatory deductions based on the employee's gross pay and the applicable tax information. These deductions may include:

• National and regional income taxes
• Social Security or pension contributions
• Healthcare or insurance contributions
• Other country-specific mandatory deductions

Be sure to apply the appropriate tax rates and contribution percentages based on the employee's income level, filing status, and other relevant factors.

Factor in Voluntary Deductions

After calculating mandatory deductions, consider any voluntary deductions the employee has elected, such as:

• Retirement plan contributions (e.g., 401(k) in the U.S. or RRSP in Canada)
• Health or life insurance premiums
• Flexible spending account contributions
• Other employee-elected benefits or deductions

Subtract Deductions from Gross Pay

To arrive at the employee's net pay, subtract all mandatory and voluntary deductions from their gross pay:

Net Pay = Gross Pay - (Mandatory Deductions + Voluntary Deductions)

Double-check Calculations and Compliance Before finalizing the net pay calculation, double-check your calculations to ensure accuracy. Verify that you have applied the correct tax rates, contribution percentages, and deductions based on the most up-to-date information for each country.

Ensure that your calculations comply with any local laws, regulations, or collective bargaining agreements that may impact payroll processing in each country.

Stay Updated on Regulatory Changes

Tax laws, social security rates, and other payroll-related regulations can change frequently. To ensure ongoing compliance and accuracy in your net pay calculations, stay informed about any updates or changes to payroll requirements in the countries where your employees are located.

By following these steps and maintaining a comprehensive understanding of country-specific payroll requirements, you can ensure accurate and compliant net pay calculations for your global workforce. Partnering with a reliable global payroll platform like Thera can help streamline this process, keep you updated on regulatory changes, and minimize the risk of errors or non-compliance.

Don't Let The Complexities of Global Payroll Hold You Back

If you find yourself struggling to keep up with the intricacies of global payroll or if you are expanding your team internationally, it may be time to consider partnering with a global payroll provider like Thera. Thera is a comprehensive global payroll platform designed to simplify and streamline the process of paying your employees across multiple countries.

By leveraging Thera's expertise and technology, you can:

✅ Ensure accurate and compliant net pay calculations for your global workforce

✅ Automate payroll processes, saving time and reducing the risk of errors

✅ Access a centralized platform for managing employee data, benefits, and deductions

✅ Receive expert support and guidance from a team of global payroll professionals

Don't let the complexities of global payroll hold you back from growing your business internationally. Take the first step by requesting a demo with Thera today.

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