Gross vs. Net Salary: Which One Should You Focus On?

Salary calculations impact every aspect of business operations, from budgeting to employee satisfaction. The distinction between gross and net salary carries significant implications for both employers and employees, affecting everything from tax compliance to financial planning. Vietnamese businesses must navigate these differences carefully to maintain competitive compensation packages while meeting all statutory requirements.

What is gross pay?

Gross pay is the total amount of money an employee earns before any taxes and deductions are taken out. It includes all forms of compensation, such as basic salary, overtime pay, bonuses, and commissions.

To calculate an employee’s gross annual pay, multiply their average weekly pay by 48 (the number of working weeks in a year). The average weekly pay is determined by multiplying the average amount earned in one hour by the average number of hours worked per week.

Gross Annual Pay = Average Weekly Pay × 48

Average Weekly Pay = (Average Hourly Earnings) × (Average Hours Worked per Week)

For example, if an employee earns 50,000 VND per hour and works 40 hours per week:

• Weekly pay = 50,000 VND × 40 = 2,000,000 VND
• Annual gross pay = 2,000,000 VND × 48 = 96,000,000 VND

What is net pay?

Net pay is an employee’s earnings total after all deductions are subtracted from their gross pay. It represents the actual amount of money an employee receives in their paycheck.

The formula to calculate net pay is: Net Pay = Gross Pay – Deductions

Deductions fall into two main categories:

• Involuntary deductions: These are mostly made up of taxes, such as income tax, social security contributions, and health insurance premiums. Employers are legally required to withhold these amounts from an employee’s gross pay and remit them to the appropriate government agencies.
• Voluntary deductions: These include any benefits your employer offers, such as retirement plan contributions, life insurance premiums, or charitable donations. Employees can choose to participate in these programs, and the corresponding deductions are taken from their gross pay.

Gross salary vs net salary: Key differences

The table below summarizes the main differences between gross salary and net salary:

Gross vs. net salary: which one should you focus on?

While gross salary and net salary differ, the total compensation remains the same. Each figure serves distinct purposes for employers and employees.

When should employers use gross salary?

Employers should reference gross salary when:

• Posting job openings and negotiating compensation with candidates.
• Developing compensation budgets and forecasting labor costs.

Gross salary provides a standardized basis for comparing compensation across positions and industries. It allows employers to analyze the full cost of each employee, including taxes and benefits.

When should employees use gross salary?

Employees should focus on gross salary when:

• Negotiating job offers or discussing raises.
• Applying for loans or making long-term financial plans.
• Evaluating job opportunities and comparing compensation packages.

Gross salary represents an employee’s total earnings potential and is often used as a benchmark for financial planning and job evaluation.

When should employers use net salary?

Employers should consider net salary when:

• Processing payroll and issuing paychecks.
• Calculating the actual cash outflow for employee compensation.

Net salary reflects the actual amount paid to employees after withholding taxes and deductions. Employers must ensure accurate calculation and timely payment of net salaries to maintain compliance with labor regulations.

When should employees use net salary?

Employees should focus on net salary when:

• Creating personal budgets and managing living expenses.
• Setting up automatic bill payments or allocating funds for savings and investments.

Net salary represents an employee’s actual disposable income and is the most relevant figure for day-to-day financial management and decision-making.

Understanding the differences between gross and net salary helps businesses make informed decisions about compensation and compliance. Vietnamese employers must manage both figures effectively – using gross salary for strategic planning and recruitment, while ensuring accurate net salary calculations for payroll execution.

For optimal payroll management and tax compliance, businesses should consider professional support. Talentnet is a specialized unit providing tax consulting and payroll services. Our experts can help businesses navigate the complexities of compensation management, ensuring compliance with labor regulations and optimizing employee benefits.