Gross vs net - difference between gross and net
What's the difference between net and gross? The simplest answer would be that "the gross amount includes a tax amount and the net amount doesn't". It's a bit tricky - in some cases we talk about the gross value before the tax was deducted (income tax), and, in others - after the tax has been added (VAT, sales tax). The two calculator just linked handle specific cases, even though they essentially perform the same calculation as gross to net calculator.
It's important to know what the base is for the tax. For example, when we're talking about gross income vs net income, the tax is based on the gross value. If we earn
$100 and the tax rate is
20%, we'd earn
$80 net. The situation is different when we're dealing with VAT and sales tax. Then the tax amount is based on the net price. An example: a widget costs
$80 net and we have
25% VAT on top of it. The tax is one-fourth of
$80, which is
$20. The gross price is then
$100. In both cases the net price was
$80 and the gross price was
$100, but the tax was
25% in the former and
20% in the latter case.
What’s the difference between gross pay and net pay?
When an employee accepts a new job offer, the negotiated salary is typically a figure determined before tax, which is known as the gross pay. The first paycheck received includes the net pay amount after tax. Gross wages equal the amount before tax whereas net pay is the sum after tax. Net pay is also commonly referred to as “take-home” pay.
It’s common practice for a new employee to accept an offer based on gross pay. It’s harder for an employer to make an offer based on net pay because each employee’s tax withholdings may differ. In this scenario, the individual might be surprised by the total amount on their first check if it doesn’t match up to the gross pay figure. If the employer does not discuss the differences between gross to net pay before the offer is made, it can cause frustration on both sides.