Misunderstanding the Difference Between Nett and Gross Pay Can Cost You Big—Here’s Why
Imagine you receive a job offer with a gross pay of Rp10 million. But when you check your bank account, only Rp8 million has been deposited, after deductions for taxes, BPJS, and insurance.
This happens because job offers typically quote gross pay before deductions are taken out. As a result, your actual take-home pay at the end of the month could be much less than expected, leaving you disappointed when you see the amount in your account.
That’s why it’s crucial to understand the difference between gross and net pay. This knowledge will help you negotiate more wisely and ensure you know exactly how much you’ll take home. Make sure you understand how to calculate your salary properly to get what you expect.
Key Differences Between Net and Gross Salary
What is Net Pay?
Net pay is the amount an employee receives after all deductions for taxes, BPJS, and other contributions. It is the final amount that is deposited into the employee’s bank account every month, commonly known as take-home pay.
What is Gross Pay?
Gross salary is the pre-tax salary that has not been deducted for taxes, BPJS, insurance, or other contributions. It’s important to remember that the take-home pay you receive each month can be much smaller than the initial gross salary amount.
What is Gross Up Pay?
Gross-up salary is a payroll calculation method where the company increases the employee’s salary to offset tax deductions or other expenses that the employee is required to pay.
The primary goal of gross-up is to ensure that employees still receive the agreed-upon net salary, even after taxes or other deductions are applied.
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Components of Gross Pay
Here are the components included in gross salary:
- Base Salary: The amount paid by the company based on the employee’s position, experience, and tenure.
- Allowances: Additional money provided by the company to support the employee’s welfare. Some common allowances included in the gross salary are:
- Transportation Allowance
- Meal Allowance
- Health Allowance
- Family Allowance
- Position Allowance
- Bonus or Incentives: Additional income based on specific achievements, such as annual bonuses or performance bonuses.
- Overtime Pay: Payment for work beyond regular hours, according to company policy.
- Other Allowances: These can include education allowances, attendance bonuses, or holiday bonuses (THR).
Gross and Net Salary Deduction Components
Here are the deductions typically found in the calculation of net salary:
- Income Tax (PPh 21): Tax deductions based on the employee’s income bracket.
- Health BPJS: Deductions for health insurance, used to cover medical expenses.
- Employment BPJS: Deductions for social security programs, including Old Age Savings (JHT), Work Accident Insurance (JKK), and Death Insurance (JKM).
- Pension Contributions: Deductions for pension funds, either managed by the company or the government, to ensure employee welfare in old age.
- Other Deductions: These can include deductions from salary advance request, social contributions, or additional insurance.
How to Calculate Net Salary from Gross Salary
To calculate your net salary from the gross salary, you can follow this example:
- Sum all Gross Salary Components
Example:- Base Salary: IDR 8,000,000
- Transportation Allowance: IDR 2,000,000
- Bonus: IDR 1,000,000
Total Gross Salary: IDR 8,000,000 + IDR 2,000,000 + IDR 1,000,000 = IDR 11,000,000
- Calculate Employee Deductions:
- Income Tax (PPh 21): IDR 500,000
- Health BPJS: IDR 200,000
- Employment BPJS: IDR 300,000
- Pension Contribution: IDR 100,000
Total Deductions: IDR 500,000 + IDR 200,000 + IDR 300,000 + IDR 100,000 = IDR 1,100,000
- Subtract Deductions from Gross Salary to Get Net Salary:
Calculation:- Gross Salary: IDR 11,000,000
- Deductions: IDR 1,100,000
Net Salary: IDR 11,000,000 – IDR 1,100,000 = IDR 9,900,000
The Dangers of Not Understanding Net vs. Gross Pay
- Disappointment After Payday
Imagine the disappointment when the salary that hits your account is much smaller than you expected. This happens when reality falls far short of your expectations.
- Budget Chaos
What if you thought the salary you were receiving covered everything, without factoring in deductions? Your budget could go off track, and financial issues may quickly arise.
- Difficulty Meeting Daily Needs
If your salary is smaller than expected, covering your basic needs can become challenging. This becomes even harder if you have obligations like loans or installments, which only add to your financial burden.
- Dissatisfaction with Your Job
A significant gap between the expected salary and the actual amount can make you feel “misled.” This can erode your enthusiasm and lower your motivation at work.
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Which One is Better: Net vs Gross Salary
Both types of salaries have their own advantages and disadvantages. To choose the most suitable salary type, there are several important factors to consider.
Net salary is ideal for employees who prefer certainty in their earnings. With this type of salary, the take-home pay received each month is the net amount, eliminating the need to worry about or calculate deductions for taxes and other contributions. This provides convenience and stability, particularly for individuals who prioritize financial management without the added burden of administrative tasks.
On the other hand, gross salary is a great option for employees who value transparency and full control over their earnings. With a gross salary, employees have the ability to manage taxes and contributions based on their personal needs or circumstances, such as taking advantage of specific tax deductions or optimizing other contributions. This transparency allows employees to clearly understand the exact deductions applied to their income.
To make the best decision, it is essential for both employees and HR to engage in open discussions. Effective communication ensures both parties can reach an agreement and align expectations regarding the salary scheme that best fits the employee’s needs and the company’s policies.
Flexible Salary Access with Earned Wage Access (EWA) by Setlary
Understanding the difference between net and gross salary is just the first step. To truly maximize the benefits, having flexibility in accessing your salary is key.
Setlary offers an Earned Wage Access (EWA) solution, allowing employees to access part of their salary before payday. This gives them more control over their finances, reduces financial stress, and ultimately boosts productivity and overall financial well-being.
It’s time to think beyond just how much you earn, but also how to manage and make the most of that salary. By understanding the differences between net and gross salary and leveraging salary flexibility, you can ensure long-term financial well-being.
