Pay & Salary

What Is Net Salary: Definition and Guide To Calculating Net Salary

July 2, 2021

Whether you're paid on a yearly, monthly, weekly or even daily basis, you may see two distinct figures on your paycheck. These two figures entail your gross and net salary. Understanding the difference between the two can help you align your pay expectations with what you actually get to take home. In this article, we explain what is net salary, what types of deductions it considers, how it differs from a gross salary and how to calculate net salary taking into account personal income tax and central provident fund (CPF) deductions.

Related: How to Negotiate Your Salary During COVID-19

What is net salary?

Net salary is the amount of money you earn after your employer deducts taxes and withdrawals from your base income. Employers may deduct your pay for items that are not in your best interests as an employee, such as liquidated damages. Among these taxes and deductions are:

  • Income taxes
  • CPF contributions
  • Health or life insurance
  • Payments to any registered co-operative society with your written consent
  • Absence from work
  • Damage or loss of money or goods
  • Supplied accommodation that you've accepted
  • Supplied amenities and services such as childcare services and recreation facilities
  • Outstanding travel compensation

As you may have noticed, some of these deductibles, such as childcare services and recreation facilities, are items employees choose voluntarily. Other responsibilities, such as income taxes, are required expenditures of every employee. These are voluntary in that they're not legally required, but you may not be able to opt out of them if they are under your employment contract.

Is net salary monthly?

Common salary period options entail weekly, semi-weekly, bi-weekly, semi-monthly and monthly. To determine net monthly income, you can simply adjust your normal salary amount and prorate it to a per-month basis. For instance, if you get paid weekly, you can just multiply this figure by 4 to come up with your monthly net salary.

What is the difference between gross and net salary?

It's important to note that the definition for gross salary can differ based on your source of income. For employees, monthly gross salary includes the base pay plus allowances payable for one month's work before deducting CPF contributions and personal income tax. This doesn't include extra compensation such as overtime and bonus, reimbursement for specific costs incurred while on the job, productivity incentive payments, and travel, food and accommodation allowances. On the other hand, for self-employed persons, the gross monthly salary refers to the average monthly profits from their business, trade or profession prior to subtracting income tax.

Consequently, the remaining amount for employees to take home after subtracting deductibles from their gross pay is their final net salary. Be mindful that most deductible items shouldn't exceed 25% of your salary for the salary period. Moreover, your employer may not deduct more than 50% of your total compensation payable in any single pay period.

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How to calculate gross salary

Before explaining what is a net salary, it's essential that you understand how your gross salary is calculated. Gross salary is an employee's total earnings for a specific time period before deductions and withholding. This is the largest figure on the payslip and is generally placed at the top of the document. When determining your gross monthly income, account for your pay as well as any additional sources of earnings. For example, list any revenue generated outside your usual office hours, such as online teaching and freelance gigs.

Listed below are some ways to derive your gross salary:

For annual pay

Not accounting for your other sources of income, if your pay is calculated on an annual basis, you can derive your gross income per month by dividing your yearly salary by 12. For instance, if you earn $120,000 annually, your gross monthly income would be $10,000. The calculation is quite simple and straightforward.

Gross monthly salary = gross annual salary ÷ 12

For hourly pay

If you're paid by the hour, you first calculate your weekly income and consequently, your annual pay before calculating your gross monthly income. Simply multiply your hourly salary by the number of hours you work per week and then 52, the number of weeks per year, to arrive at this figure. Finally, divide this figure by 12 to calculate your monthly gross income.

Gross monthly salary = (hourly rate x number of work hours per week x 52) ÷ 12

For a monthly-rated employee

The gross rate for one day of pay is calculated by multiplying your monthly gross salary by 12. Then, take this figure and divide it by 52 and the average number of days you're required to work in a week. For instance, if your gross salary per month is $3,000, and you work 5 days per week, your gross daily pay would be $138.46.

Gross daily pay = (12 x monthly gross rate of pay) ÷ (52 × average number of days an employee is required to work per week)

For businesses

The most significant measure for calculating a business entity's gross monthly income is the company's revenue. To derive the monthly gross income, you can subtract the cost of goods sold from total revenue. The total gross revenue includes all direct and indirect sales generated by the business.

Gross monthly income = gross monthly revenue - the cost of goods sold

How to calculate net salary

After deriving your gross salary, you can compute all taxes, CPF contributions and other deductions that are to be subtracted from your gross salary.

Central Provident Fund (CPF) Scheme

CPF is a government-backed insurance scheme that allows working Singaporeans and permanent residents to save for retirement as well as other scheduled and unexpected costs such as housing and healthcare. Employees and employers both contribute to the CPF. Employees' portion is deducted from the gross salary and employers' contribution is on top of the stipulated salary. As an overview, listed below is the percentage of CPF contribution required by employees and employers based on the employee's age group:

Age of employee

CPF contribution by employer

CPF contribution by employee

Total CPF contribution rate

Up to 55 years old

17%

20%

37%

55 to 60 years old

13%

13%

26%

60 to 65 years old

9%

7.5%

16.5%

Above 65 years old

7.5%

5%

12.5%

CPF calculations take into account both your regular monthly salary, known as ordinary wage (OW) and any additional compensation you may receive. OW has a pay cap, which is presently fixed at $6,000 per month. Your employer can only make CPF payments up to this amount and likewise, you can choose to limit your contribution to this ceiling. There's also a second limit called the extra wage (AW) ceiling, capped at $102,000 per year.

Income Tax

Singapore's personal income tax rates are progressive for resident taxpayers. This implies that higher-income earners pay a proportionally greater tax, starting at 0% and ending at 22% above $320,000. It's important to note that income tax rates depend on your tax residency status. Below is the resident tax rates:

Chargeable Income

Income Tax Rate (%)

Gross Tax Payable ($)

First $20,000
Next $10,000

0
2

0
200

First $30,000
Next $10,000

-
3.50

200
350

First $40,000
Next $40,000

-
7

550
2,800

First $80,000
Next $40,000

-
11.5

3,350
4,600

First $120,000
Next $40,000

-
15

7,950
6,000

First $160,000
Next $40,000

-
18

13,950
7,200

First $200,000
Next $40,000

-
19

21,150
7,600

First $240,000
Next $40,000

-
19.5

28,750
7,800

First $280,000
Next $40,000

-
20

36,550
8,000

First $320,000
In excess of $320,000

-
22

44,550

Related: Highest Paying Jobs in Singapore

What is the net salary of $75,000?

The income tax and your CPF contribution for a gross salary of $75,000 are estimated to be $1,920 and $14,400 annually. This brings the annual net salary amount to $58,680 or $4,890 monthly, which is 78.2% of your gross salary. Your average tax rate is 21.8% and your marginal tax rate is 7%. Additionally, your employer has to pay a CPF contribution of $12,240. That said, considering the taxes paid by you and your employer, the real tax rate comes to 32.7%. You can use the net salary tax calculators available online to ease your calculation process.

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