How Salary is Calculated: Gross to Net
Understanding the process of converting a gross amount to a net amount is crucial for every employee. Here is an explanation of the basic steps in that calculation.
Basic Concepts
- Gross 1 SalaryThe salary agreed upon with the employer from which pension insurance contributions, relevant taxes, and deductions are calculated.
- Gross 2 SalaryTotal employer cost (Gross 1 + employer contributions such as health insurance).
- Net SalaryThe amount paid to the employee's account.
Calculation Steps (from Gross 1 to Net)
1. Pension Insurance Deduction
Pension insurance contributions (I. and II. fund, depending on the state legislation) are deducted from the Gross 1 amount. The result of this step is called income.
2. Personal Deduction (Tax-free part)
The amount of the personal deduction is deducted from the income. Personal deduction depends on factors such as number of dependent family members, disability, etc. The result of this step is tax base.
3. Tax Calculation
Tax rates are applied to the resulting tax base, depending on the law and place of residence.
4. Final Net Amount
Net salary is obtained by deducting calculated taxes (and any local surtaxes) from the income. This is the amount the worker receives on their account.
Net = Income - Tax