Net vs gross pay - calculation rules and application principles
Translated with DeepL.com (free version)
Publishing date: 05.03.2024
This article will help you understand the difference between gross and net pay and the rules for calculating these two financial rewards, which are earned monthly due to working for an employer. For a better understanding of these elements, you will be able to consult a concrete example of the calculation of the gross and net salary of a Romanian employee.
Contents:
1. Net salary vs gross salary - general information
1.1. What is gross and net pay?
1.2. Gross and net pay - what are the differences between them?
2. Calculation of net gross salary
2.1. Gross vs net salary - calculation rules for gross salary
2.2. Net vs gross pay - rules for calculating net pay
3. Net and gross salary - calculation example
1. Net salary vs gross salary - general information
The work done by an employee, whether working for a state or private company, is rewarded under Romanian law every month by the payment of a variable amount, known as a salary. This model has been used for thousands of years as a way of encouraging work and providing the possibility of supporting a family through work.
The modern wage is a complex concept designed to strike a balance between the individual finances of employees and those of the Romanian state, which obtains part of its revenue through taxation on labor. Two types of wages are used to put this principle into practice: gross and net. Both versions must be known by employees and employers alike so that there are no misunderstandings due to differences between the amounts promised at the job interview and those received at the end of each month.
1.1. What is gross and net pay?
The employee's remuneration can be calculated in two different ways, namely gross and net pay. These concepts are not sufficiently well known by all workers, which means that misunderstandings can be difficult to resolve. To avoid such situations, it is useful to briefly define the two concepts and the differences between them.
Gross pay is the total amount that an employer offers each month in return for work done by an employee. This salary includes the amounts agreed in the employment contract, i.e. all the money, including taxes and compulsory contributions that will go into the accounts of the Romanian state.
The gross salary includes all the expenses an employer has to pay for an employee's work. However, it should not be understood that the entire amount will go to the worker, as the total income also includes taxes and social contributions owed to the state.
Many people don't attach importance to this type of salary, but economists recommend that the amount should be taken into account because it can help in many circumstances:
- In most cases, salary negotiations before hiring take the gross salary as a starting point, to which bonuses, bonuses or other useful benefits can be added;
- Knowing the gross salary helps in evaluating multiple job offers, as it can differentiate between the benefits that can be obtained in different places;
- By knowing the gross salary, employees can easily calculate how much money is transferred to the state finances to support areas such as public safety, education, health, social assistance, infrastructure support, etc.
Net pay, on the other hand, is the amount the employee receives at the end of each month's work. In popular terms, the benefit is known as 'take-home pay', which results from converting gross pay into net pay. To arrive at this result, taxes and other contributions provided for in Romanian tax legislation are deducted from the negotiated payment. The net wage is the direct part of the payment the worker receives from the employer, the rest of the money going to various state institutions to support various activities.
1.2. Gross and net pay - what are the differences between them?
The differences between the gross and net salary result from the economic legislation of the Romanian state. Thus, according to this law, the individual employment contract must specify the gross salary, i.e. the total amount that the employer allocates to the employee each month. Of this income, a variable part is paid to the Romanian State, and the remainder, i.e. the actual amount taken by the worker, is the net salary. This is the main difference between gross and net pay, the latter being made up of the actual money received plus taxes, contributions and duties paid to the state.
Another difference in the comparison of gross vs net pay is the value of the gross and net pay, with gross pay always being higher than net pay. Currently, depending on the level of pay, about 40 percent of the gross salary agreed upon when the individual employment contract is signed is paid in the form of income tax (10 percent), social health insurance (10 percent) and pension contributions (25 percent). It should be noted that these amounts, although paid by the employee, are calculated and withheld by the employer so that there are no situations in which a particular worker does not pay his or her statutory taxes.
2. Calculation of net gross salary
The rules for calculating gross and net pay in Romania are derived from tax and social security legislation developed over time. Although the absolute values change from one period to another, the principle is the same, namely that each employee uses the money he or she earns each month (gross salary) to support the operation of services provided by the Romanian state to all its inhabitants (payment of pensions, salaries of state employees, provision of hospitals and schools, etc.).
After deducting all the sums due each month, the result is an income that the worker receives, called the net wage. Given these elements, both employees and employers must know some general information about pay.
2.1. Gross vs net salary - calculation rules for gross salary
The gross wage of workers in Romania is easy to identify, as it is clearly stated in the individual contract signed at the start of an employment relationship. A relatively simple formula is used to calculate the actual gross wage by adding several elements:
- The basic salary is the amount agreed at the time of employment and is the main part of the gross salary. Its amount is variable, depending on the work performed, the level of qualification, the hazardous nature of the work, or other elements negotiated in each case.
- The second element of gross pay is the various bonuses and allowances that are added to basic pay. These include night-time bonuses, stress bonuses, overtime and special working conditions.
- The third element is bonuses offered by the employer on various occasions, such as holidays or vacations.
- Other benefits, such as meal and gift vouchers, can also be taken into account when calculating gross pay.
2.2. Net vs gross pay - rules for calculating net pay
A different set of rules applies to the calculation of the net salary, as both items reduce the resulting amount and items that may reduce the debt to the state. The basic idea of calculating net pay is to take into account the gross salary, from which certain amounts are deducted and paid to the Romanian state. The following procedure is used to calculate the net salary:
- Income tax is deducted from the gross salary, which is currently 10% of the total income. This amount may be reduced if there are certain personal deductions, such as income reduction for mothers with more children or for people earning the minimum wage.
- Another contribution that is deducted from gross pay is the contribution to support the health system, which is also 10% of gross pay.
- A significant percentage, which is deducted from the gross salary, is that for compulsory social contributions (pensions, unemployment), which is 25 percent.
The actual calculation of net pay is quite difficult to do, as several elements can contribute positively or negatively to its value. That is why people who want, either from the position of employer or employee, to be sure of a correct calculation can turn to business consultancy firms offering HR and payroll services, accounting and quality administrative services.
The exact figure can only be given in the case of the minimum wage in the economy, where the taxes due are accurate, in this case for the year 2024 the gross minimum wage is 3300 lei, resulting in a net minimum wage of 2079 lei.
3. Net and gross salary - calculation example
The current context of employee pay in Romania is quite complex, with many workers not knowing what is meant by gross or net salary, whether the basic salary is net or gross, or why the actual salary received at the end of the month is lower than that agreed in negotiations when signing the permanent or fixed-term contract at the beginning of the employment relationship.
For better information, it is advisable to consult Romanian labour legislation and to use the various net vs gross salary calculators available to those interested.
Another useful element in this respect is to consult a concrete example of the calculation of the gross and net salary of a worker working in Romania. It is based on the idea that, when negotiating a salary, a worker is promised a basic salary of 5000 lei per month, plus a 10 percent hazard bonus and meal vouchers worth 300 lei per month. The gross salary in this case is calculated as follows:
- Basic salary of 5000 lei per month;
- 10 percent hazard bonus (i.e. 500 lei per month);
- Meal vouchers (300 lei per month).
According to this data, the actual gross salary is 5800 lei per month. In some cases, some employees do not realise that this is not the amount they receive at the end of a month's work and are unpleasantly surprised to see a much lower income on their pay slips. Even if it seems unfair, this is legal, stemming from the Romanian state's tax legislation, which is based on the principle of taxation on work, i.e. the deduction from the total sums earned of income destined for state finances.
The following deductions will be made from the gross salary to calculate the net salary:
- Health contribution of 10 percent, i.e. still 580 lei per month;
- Social security contribution of 25 percent of gross salary, i.e. 1450 lei per month;
- Income tax which is 10 percent of the amount remaining after payment of contributions, i.e. 377 lei per month
The final calculation according to these rules is as follows: gross salary (5800 lei) - income tax (377 lei) - health contribution (580 lei) - social security contribution (1450 lei). More specifically, a total of 2407 lei is deducted from the 5800 lei negotiated at the beginning, resulting in a net salary of 3393 lei.
In conclusion, both employees and employers need to be aware of the differences between gross and net pay and how the two are calculated to avoid unpleasant situations.