Understanding Gross Pay and Its Difference from Net Pay

Managing payroll is essential but often complex, as employees may have different gross pay, work hours, and benefits. Even with a small team, businesses must handle various pay structures.

Kapag nagkamali sa payroll, hindi lang employees ang apektado; maging financial records at legal compliance ng business mo, delikado rin.  

Getting payroll right starts with calculating total earnings before deducting taxes and benefits. Ito ang number one na makikita mo sa payslip mo, at dito nagbabase kung magkano ang actual na take-home pay mo. 

This article covers everything you need to know about gross pay: how it works, how it differs from net pay, and how to calculate it for both hourly and salaried employees.

What is Gross Pay?

Gross pay refers to an employee’s total earnings before deductions, such as taxes, health insurance, or retirement contributions. It can come from a single source or multiple income streams, depending on the employee’s role and agreement.

For example, a freelance worker in the Philippines earning ₱20,000 from one project and ₱30,000 from another would have a gross salary of ₱50,000.

Similarly, a restaurant employee earning ₱15,000 in regular wages, a ₱5,000 holiday bonus, and ₱3,000 in tips would have a total earnings of ₱23,000 for that period.

Your gross pay is typically the largest figure displayed on your payslip. It represents the total amount your employer compensates you based on your agreed salary or hourly rate. For example, if your employer agreed to pay you ₱250 per hour and you worked 30 hours in a pay period, your income would be ₱7,500.

What is Net Pay?

Net pay is the amount you take home after taxes and deductions have been subtracted from your gross pay. It is the actual sum deposited into your bank account or reflected in your paycheck.

Typically, net pay is displayed prominently on your payslip, often in a larger or bold font, making it easier to differentiate from gross payroll.

What’s the Difference between Gross Pay and Net Pay?

Gross pay and net pay are key components of employee compensation. Gross pay reflects total earnings, while net pay deducts taxes, contributions, and withholdings, representing “take-home pay”.

Employers focus on gross salary for salary negotiations, labour cost budgeting, and compliance with wage laws. Employees, on the other hand, use net pay to manage their personal finances. Both metrics are recorded on pay stubs and tracked using payroll management systems or ERP systems.

Discrepancies in gross or net pay calculations can signal payroll errors and must be resolved promptly to avoid tax issues or incorrect payments.

Differences Between Gross Pay and Net Pay

Below is a table that describes in detail the differences between gross pay and net pay.

Main Components of Gross Pay

Gross pay in the Philippines is more than just a number on a payslip; it represents the total earnings an employee is entitled to before any deductions. This includes various components of compensation that may vary depending on the employment arrangement.

1. Salary or Hourly Wage

In the Philippines, gross pay for hourly workers depends on the hours they work and their agreed-upon hourly rate. Salaried employees, on the other hand, earn a fixed monthly compensation regardless of hours worked.

The Labor Code of the Philippines requires that all employees are paid at least the regional minimum wage. For example, an hourly worker earning ₱150 per hour and working 40 hours in a week would have a total income of ₱6,000.

Salaried employees are usually compensated monthly, with businesses commonly using biweekly or monthly pay schedules, as stipulated by Article 103 of the Labor Code.

2. Overtime

Overtime pay is an additional earning that employees receive when they work beyond the standard eight-hour workday. Under Article 87 of the Labor Code, overtime must be paid at 125% of the regular hourly rate.

For example, if an employee earns ₱200 per hour, their overtime rate would be ₱250 per hour.  Employees working on rest days or holidays are entitled to higher rates, ensuring fair compensation for extended work hours.

3. Bonuses and Commissions

Bonuses and commissions are included in gross pay and serve as incentives for employees. In the Philippines, bonuses are often provided during the holiday season, for annual performance reviews, or for achieving specific milestones.

Commissions, common in sales roles, are calculated as a percentage of sales or based on performance metrics. While bonuses are typically discretionary, they must still align with employment agreements, as required by the Labor Code.

4. Other Earnings

Gross pay may also include other earnings, such as allowances, tips, holiday pay, and service charges. In restaurants and similar establishments, service charges are distributed to employees as per Republic Act No. 11360, with 85% going to workers and 15% retained by management.

Employers must include these earnings in gross pay calculations to ensure accurate payroll in the Philippines and compliance with tax regulations. To ensure that all components of gross pay are accurately reflected, using a clear and professional payslip template is essential.

Examples of Gross Pay

This example helps employees and employers understand fluctuations in gross income. Employees can see how their additional work hours or bonuses affect their earnings, while employers can account for changes in withholdings and deductions during higher-earning periods.

For the last two weeks, the worker’s gross pay increased due to holiday pay and overtime, leading to higher taxes and deductions.

Gross pay can vary even when the hourly rate remains consistent. In this example, overtime, holiday pay, and a performance bonus cause increases in gross pay during two of the month’s pay periods.

Typical Deductions of Gross Pay

In the Philippines, your gross annual income represents the total earnings you receive over a year before any deductions. This encompasses your monthly gross pay multiplied by 12. Your gross income will always be higher than your net income, as it doesn’t account for any subtractions.

Deductions from your salary can be either mandatory or voluntary.

Mandatory Deductions:

Here are the mandatory deductions every employer must pay up:

1. Social Security System (SSS) Contributions: Both employers and employees are required to contribute to the SSS, which provides benefits such as sickness, maternity, disability, retirement, and death benefits. As of 2024, the contribution rate is 14% of the monthly salary credit, with 9.5% shouldered by the employer and 4.5% by the employee.
2. Philippine Health Insurance Corporation (PhilHealth) Premiums: PhilHealth offers health insurance coverage to employees. The premium rate is set at 4.5% of the employee’s basic monthly salary, shared equally between the employer and the employee.
3. Home Development Mutual Fund (Pag-IBIG) Contributions: Pag-IBIG provides housing loans and savings programs. For employees earning more than ₱1,500 monthly, both the employer and employee contribute 2% of the basic salary, with monthly contributions capped at ₱100 each.

Voluntary Deductions:

Beyond mandatory contributions, employers may also deduct amounts for:

• Retirement Plans: Some companies offer private retirement fund contributions, which are deducted from your salary based on agreed terms.
• Health Insurance Premiums: Additional health benefits or insurance plans beyond PhilHealth may be offered, with premiums deducted from your pay.
• Union Dues: If you’re a member of a labour union, dues may be deducted as authorized.
• Loan Repayments: Repayments for company loans or advances can be deducted from your salary.

It’s important to note that while these voluntary deductions are not mandated by the government, they may be stipulated in your employment contract or agreed upon between you and your employer.

Employers are required to provide a detailed breakdown of these deductions in their payslips to maintain transparency.

Gross Pay Formula and How to Calculate

Calculating gross pay can range from straightforward to complex, depending on the nature of the job and the compensation structure. For companies with salaried employees and no overtime or bonuses, payroll calculations are often simple.

The general formula for gross pay is:

Gross pay = Regular earnings + Overtime pay + Bonuses + Commissions + Other earnings

which will be divided into:

1. Gross Pay for Hourly Employees

To calculate gross pay for hourly workers, multiply the hours worked by their hourly rate. For overtime or special hours like hazard pay or holiday pay, use the same formula: hours worked multiplied by the corresponding rate

Many businesses use digital timekeeping systems to record work hours automatically, reducing manual errors in payroll calculations.

The formula for hourly employees’ gross pay is:
Gross pay = (Regular hours x Hourly rate) + (Overtime hours x Overtime rate) + (Special hours x Special rate)

For example, an hourly worker during a busy season typically earns ₱300 per hour for a standard 40-hour workweek. In one pay period, they worked 50 hours, including five overtime hours (at time and a half, or ₱450 per hour) and five holiday hours (at double the rate, ₱600 per hour).

Their gross pay would be calculated as:

Gross pay = (40 regular hours x ₱300) + (5 overtime hours x ₱450) + (5 holiday hours x ₱600) = ₱21,000

2. Gross Wage for Salaried Employees

Salaried employees receive a fixed amount per pay period, calculated by dividing their annual salary by the number of pay periods in a year. For instance, a monthly salary is one-twelfth of the annual salary, while a biweekly salary divides the annual salary by 26 pay periods.

Additional earnings, such as bonuses or commissions, must also be included when calculating gross pay. These can significantly impact the total gross pay for that period. Tracking these extra payments ensures employees are fully compensated according to their employment terms.

The formula for salaried gross pay is:

Gross pay = (Annual salary / Number of pay periods) + Additional earnings

For example, a salaried employee earning ₱600,000 annually and paid monthly would receive ₱50,000 per pay period (₱600,000 / 12). If they receive a performance bonus of ₱10,000 in a particular month, their gross pay for that period would increase to ₱60,000.

However, businesses with more intricate compensation models, such as commissions or performance-based bonuses, may require more effort or the use of payroll software or an ERP system to simplify calculations.

Calculate Payroll Accurately with HashMicro Payroll System

Managing payroll can be a challenge, especially when handling multiple employees with different salaries, tax contributions, and benefits. HashMicro’s Payroll System simplifies payroll processing by automating calculations for gross and net pay effectively.

HashMicro’s cloud-based solution makes payroll processing faster and more precise. It automatically calculates SSS, PhilHealth, and Pag-IBIG deductions, generates payslips, and ensures employees receive the correct salaries on time.

Furthermore, it also integrates smoothly with accounting and HR systems for easier payroll management in just one tool. How does it do that? Simple; it is equipped with these features:

• Automated Payroll Processing – Covers salary calculations, tax deductions, and seamless bank transfers with major banks.
• Regulatory Compliance – Ensures adherence to the Philippines’ Labor Laws for contracts, attendance, leave, overtime, and payroll.
• Employee Self-Service & Mobile App – Employees can manage attendance, leave, overtime, and payslips through a mobile app, reducing HR workload.
• Comprehensive Leave Management – Includes leave encashment, unpaid leave, carryover options, and expiration dates for flexible policies.
• Overtime & Late Deduction Automation – Accurate calculations for overtime, meal allowances, and late deductions are processed directly in payroll.
• Employee Journey & Career Transitions – Covers everything from onboarding, probation, training, and promotions with KPI tracking and gap analysis.
• Expense & Loan Management – Automates cash advances, loan disbursement, and repayment through payroll for better financial tracking.

Conclusion

Gross pay is the total amount an employee earns before deductions, including salary, overtime, and bonuses. Kapag alam mo ang pre-tax salary mo, mas madali mong matatrack ang kita mo at maiwasan ang payroll issues.

Managing payroll manually can be a hassle, especially with taxes, deductions, and benefits to sort out. That’s why HashMicro’s Payroll System makes payroll simple by automating calculations, tax withholdings, and payslips.

Whether hourly or salaried, understanding gross pay keeps everything clear and compliant with labour laws. Wala nang manual adjustments, wala nang payroll headaches; lahat automatic at tama ang sweldo ng employees mo every cycle.

With HashMicro’s cloud-based payroll solution, payroll runs smoother, faster, and with less stress. Employees can check payslips, request leave, and track attendance all in one app.

If you want to experience the convenience this system brings, try the free demo now!

FAQ on Gross Pay

• Does total earnings include bonuses and commissions?

  Yes, total earnings cover all income before deductions, including base pay, bonuses, commissions, and other allowances.

• How does pre-tax salary affect tax brackets in the Philippines?

  Pre-tax salary determines your taxable income, which places you into a specific BIR tax bracket for income tax computation.

• How can total pay impact SSS and Pag-IBIG contributions?

  SSS, Pag-IBIG, and PhilHealth contributions are calculated as a percentage of total pay, affecting monthly deductions and benefits.

• Is full compensation used when applying for loans or mortgages?

  Banks and lenders assess full compensation to gauge an applicant’s ability to repay, as it reflects total income before deductions.