The liquid salary or also known as net salary, corresponds to the monthly amount actually received by a dependent worker, after withholding income tax and Social Security contribution. In other words, is the salary deposited by the employer in the employee's bank account at the end of each month.
Be careful not to confuse net wages with gross wages, which is the total amount that a company pays to a dependent worker before deductions. While the first corresponds to the amount registered in the workbook, the second is the money that actually goes to the worker's account, after the Calculation of the Net Salary.
Advertisements
In this article you will find:
What is the net pay?
By differentiating the gross wage from the liquid wage in the simplest terms, eThe net salary is the amount of income that finally reaches your pocket or your bank account. Net or net pay is what happens to an employee's earnings after all gross payroll deductions have been deducted.
Advertisements
It does not matter if we are talking about gross wage versus net hourly wage or gross wage versus net wage; In the case of any type of income, the basic principles of gross or liquid remain the same.
Some deductions that affect gross pay and the net pay formula, such as taxes to social security in some countries, they are required and the payroll companies retain them automatically. Other deductions are voluntary and are only made by mutual agreement of the employee and the employer.
Advertisements
Differences between gross and net salary
Gross pay is the amount an employer pays a person before deductions and taxes are made.
Gross salary can be calculated by adding base salary, employer contribution, transportation allowance, reimbursement allowance medical allowance, hunger allowance, house rent allowance, food allowance, vacation travel allowance and any other subsidy. All this will depend on the country, the company where you work or your employer.
Advertisements
It should be noted that the gross salary does not take into account any of the deductions made. In other words, it is the salary that is paid after adding all the benefits and allowances, but before making deductions such as the employee's contribution to the provident fund (EPF) and taxes. Net pay is the net pay left after deducting allowable deductions.
These deductions include tip, EPF, retirement, professional tax and income tax or TDS (tax deducted at source), among others. It should be noted that, compared to gross salary, the amount calculated as net salary will be less due to the various deductions allowed.
Advertisements
Differences of the basic salary and the liquid
Basic salary is the amount a person receives before extras are added or payments are deducted. An employee's basic salary does not include bonuses, overtime pay or any other compensation potential of an employer, nor does it take into account any deductions made as professional taxes, TDS, etc. The basic salary is fully taxable.
Net pay, on the other hand, is what an employee takes home after making all required deductions from gross pay. It can be calculated by first adding the base salary, HRA, and allowances, and then deducting income tax, EPF, and professional tax. The net salary will be less than the gross salary on account of the mandatory and voluntary deductions. The total amount of the base salary is part of the net salary.
How is the net salary calculated?
The formula to calculate net salary it's pretty straightforward.
Net salary = Gross salary - Deductions
Gross salary can include the following:
- Base salary
- Transport allowance
- Employer FP contribution
- Overtime pay
- Cousin
- Medical reimbursement grant
- Shortage of Living Subsidy
- Home rental allowance
- City compensatory allowance
- Performance incentives
- Food subsidy
- Leave the travel allowance
- Any other assignment
And, as we said earlier, you can manipulate that equation to calculate gross or net salary. The liquid salary, also known as the take-home salary, is the amount that is credited to an employee's salary account on a monthly basis (or weekly, depending on the terms of the employment contract).
The importance of knowing your net salary
Now that you know how to calculate your net salary, It is important because it will help you control the expenses you have after you receive your payment.. Among other key reasons to know your net worth are:
Key landmark
Your net worth is an important benchmark that measures your household's successes.
Set goals
Knowing your net worth is essential to setting your immediate and long-term goals and planning your family.
Track progress
You should track changes in your net worth as soon as possible to ensure that you are making progress in managing your money properly.
An emergency fund is essential
You must have liquid or cash-like assets for potential problems that may arise.
To borrow
When you apply for a loan to buy a house, a car, for college tuition, or to invest in a new business, you'll want to review your net worth to make sure you can afford the incremental costs that will assume.
Pay the debt
Pay off your high-yield debt, typically your credit card debt, which uses the magic of compound interest against us if we only make the minimum interest payments.
Refinance mortgage debt
You can pay off all or part of your mortgage debt if your interest rate is higher than 5%.
Build assets
Add to your retirement accounts up to the limit, earn your employer's equivalent, and increase investments in a low-cost index fund.
Financial planning
Your roadmap to building wealth begins with knowing your net worth and making valuable changes like reducing expenses, increasing savings, and investing.
Financial security
Having financial security means not worrying about money and living comfortably with peace of mind.
