Understanding your employees' gross pay is crucial for smooth payroll processing and maintaining transparency with your team. In this article, we’ll explain the definition of gross pay, the difference between gross pay vs. net pay and your responsibilities as an employer.
What is gross pay?
Gross pay is the total salary you agree to pay an employee before any deductions are made, like taxes, KiwiSaver contributions and student loan repayments. This includes their base salary, bonuses, commissions, and other taxable income. It's the number you base an employment agreement on, and it will be clearly stated in contracts and payslips.
What’s the difference between gross and net pay?
As well as gross pay, your employee’s ‘net pay’ will also appear on their payslip.
While gross income shows the amount your employee has earned before any deductions, net pay reflects the amount they will receive after deductions are made.
Net pay is always a lower figure, reflecting the amount that will be paid into your employee’s bank account. For this reason, net pay is often referred to as ‘take-home pay.’
What deductions are taken from gross pay?
When it comes to payroll deductions from an employee's gross pay, accuracy is vital. Always double-check income tax brackets, contribution rates and other relevant details to avoid errors. If you’re unsure about complex payroll situations or specific deductions, consult a qualified advisor like Employsure.
Mandatory deductions
Income Tax: Payroll taxes are the biggest amount, calculated based on each employee's tax bracket.
KiwiSaver: If an employee chooses to participate in this retirement contribution scheme, you deduct their contribution and match it with your own (employer contribution is mandatory if they meet eligibility criteria).
Student Loan Repayments: If applicable, you automatically deduct these from their salary. It's like helping them gradually pay off the tools they used to build their skills.
ACC Levies: These contribute towards the Accident Compensation Corporation, protecting your team in case of unforeseen mishaps. Think of it as collective insurance for everyone's wellbeing.
Are employers allowed to make additional deductions?
While the above are mandatory, remember you can only make additional deductions under specific circumstances:
Written consent and employee benefit: Like deducting the cost of uniforms or tools they specifically require for their job. Ensure they understand the benefits and agree freely.
Court orders: For example, child support payments.
Law or regulations: Like compulsory superannuation in some industries.
Employment agreement or registered agreement: Be transparent. Clearly outline any deductions in their contract before they sign.
An employee’s written agreement must be genuine, and they can’t be forced into agreeing to any deductions. It’s important to note that deductions should be shown on your employee’s payslip, as well as their time and wages records.
Calculating gross pay
If you’re an employee in New Zealand and you want to calculate your gross pay, you can use the information included in your latest payslip. The calculation will vary depending on whether you are paid an annual salary or hourly wage.
How to calculate gross pay for an annual salary
The salary recorded in your employment agreement will be your official annual gross income. You can also find your gross salary on your payslip. If your payslip shows a gross monthly pay of $6,000, then you simply multiply this amount by 12, (6,000 X 12 = 72,000). Your gross annual pay is $72,000.
If you receive any bonuses, financial benefits, or commissions, you’ll need to add these, too. If you earn $72,000 as a base annual salary, but you’re also paid $5,000 in bonuses for the year, your gross annual pay is $77,000.
How to calculate gross pay for an hourly wage
If you earn an hourly rate of pay and you’re unsure of how many hours you’ll work annually, it’s easiest to wait until the end of the year and calculate it then.
If you work set hours each week, you can calculate your gross annual pay yourself in advance. If you work 20 hours a week at an hourly rate of $20, your weekly gross pay is $400, your monthly gross pay is $1,600, and your gross annual pay is $19,200.
Remember – if you take any unpaid days off in the year, you’ll need to deduct the pay from your gross pay. Similarly, if you receive a pay rise or take on any additional shifts, you’ll need to recalculate the rest of the year with the new pay rate or increased number of hours included.
Calculating net pay
To calculate net pay in New Zealand, you must understand how to navigate Pay As You Earn (PAYE) taxes and deductions.
Imagine Sarah, who earns $4,000 gross pay monthly. First, her employer deducts PAYE at a rate dictated by her income and tax code. Let's say Sarah belongs to the 30% income tax bracket. Payroll taxes of roughly $1,200 go directly to the Inland Revenue. Then, various deductions chip away further. Perhaps Sarah contributes $400 to KiwiSaver, $200 for student loan repayments, and $50 for union fees.
By subtracting these expenses and deductions from her gross pay, Sarah arrives at her net pay – $2,150 — landing in her bank account.
Remember, this is a simplified example. Individual circumstances can involve different income tax rates, deductions, and credits. Tools like online PAYE calculators or consulting a professional can help ensure your net pay calculations are accurate.
What is gross salary?
Gross salary refers to the total amount an employer regularly pays to salaried employees. It’s normally expressed as an annual sum divided into fortnightly or monthly payments. When your employee starts working for your business or they receive a pay rise, their gross salary will be agreed upon and laid out in an employment contract.
Much like gross pay, gross salary is an employee’s income before tax and other contributions are deducted. Net salary refers to your employee’s take-home salary after deductions are made.
Why is gross salary important?
As an employer, it’s vital you have an accurate understanding of each employee’s gross salary. Gross salary is used to calculate the percentage of an employee’s pay you should withhold for taxes, while it can also be used to calculate an employee’s redundancy pay entitlements.
Businesses also rely on gross salary information when budgeting and financial planning. By knowing your total labour costs, you can allocate financial resources effectively and make informed decisions about expenses, investments, and future growth opportunities.
As an employee, the gross salary you offer will be crucial when deciding whether or not to accept a job offer. Gross salary is also important to employees because it is used by creditors when they review loan applications.
What is gross income?
To calculate annual gross income in New Zealand, you must include an employee’s gross salary, as well as any:
Tips
Bonuses
Employee benefits: Certain non-cash benefits provided by your employer (e.g., meal allowance, phone allowance)
Dividends
Pension payments
Gross annual income refers to all the above combined into a yearly sum.
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Frequently Asked Questions
What's the difference between gross and net income?
Gross income is your total earnings before any deductions or taxes. Think of it as the full amount you earn before Inland Revenue comes knocking. Net income, on the other hand, is what's left after all those deductions and taxes have been subtracted. It's the money that actually lands in your bank account and represents your true take-home pay.
How do taxes affect the transition from gross to net pay?
Taxes are the biggest chunk taken out of your gross pay. In New Zealand, you'll be taxed based on a PAYE (Pay As You Earn) system, where a portion of your income is automatically deducted by your employer and sent directly to the Inland Revenue. The amount deducted depends on your tax bracket and personal circumstances.
Why is it important to understand my gross vs. net earnings?
Knowing the difference between gross and net pay is crucial for budgeting, financial planning, and simply understanding your true financial picture. You need to know what's coming in and going out to make informed decisions about your spending and saving. For example, knowing your net pay helps you calculate how much you can afford to rent, invest or pay towards debt.
What deductions are commonly taken from gross pay in New Zealand?
Besides taxes, several deductions can chip away at your gross pay in New Zealand, including KiwiSaver retirement account contributions, student Loan repayments, ACC levies, and union fees. Some employers may deduct expenses like health insurance premiums or work equipment costs.
