How Salary is Calculated: Net to Gross
Converting a net salary (the amount an employee receives in their account) back into a gross salary ("Gross 1") is a more complex process. Since taxes and contributions are calculated on the gross amount, calculating net to gross requires solving a reverse mathematical operation.
Why Is the Reverse Calculation More Complex?
When calculating from gross to net, steps and percentages are applied linearly. However, when starting from the net amount:
- We do not know the tax base in advance, because the tax depends on the gross amount we are looking for.
- Personal deduction (tax-free part) further complicates the formula, especially when the net amount "jumps" across different tax brackets.
- Local rates or additional taxes (if they exist) depend on the tax base we have yet to determine.
Reverse Calculation Principle
Algebraic Approach (Formula)
The calculation is usually solved by setting up an equation where "Gross" is the unknown (X). Computer programs (calculators) set up an equation based on a known net amount, personal deduction factors, and location, and through algebraic manipulations "extract" X (Gross amount).
This approach requires the program to pre-check which tax bracket the requested gross amount falls into based on the estimated net amount.
Iterative Approach ("Guessing")
Many computer systems simplify this problem using the so-called iterative approach or a brute-force method of close guessing.
- A "Gross" amount is assumed (e.g., Net divided by 0.7).
- The "Net" is calculated from that assumed Gross amount.
- The resulting Net is compared with the requested Net.
- If there is a difference, the Gross is slightly increased or decreased.
- The procedure is repeated (iterated) in milliseconds until the calculated net exactly matches the requested net amount.
Why Is Gross 2 (Total Cost) Important?
When you negotiate a salary by talking about a net amount, the employer always has the so-called Gross 2 in mind. Even though you are negotiating about the money you will receive, the actual cost for the company specifically for your position will be significantly higher due to contributions paid on the salary, i.e., on top of your agreed Gross 1 amount.