Basic salary vs gross salary: what's the difference?
Basic salary and gross salary are among the many moving parts of the payroll process. Anyone in the accounting, finance or related field can explain these payroll components, even with their eyes shut.
For some people, base pay and gross salary may bring confusion as both terms refer to employee compensation. However, these two are neither similar nor interchangeable—they involve different factors and calculations.
Let’s take a closer look at these integral elements of a compensation package!
What is a basic salary?
Basic salary or base pay is the fixed amount of money paid to an employee, excluding the deductions (i.e., tax contributions, benefits, insurance, etc.) and additions (i.e., bonuses, overtime pay, etc.). The rate can be stated as hourly, weekly, or annual.
Base rates vary depending on many factors, including:
1. Labour law
The labour regulations of a country directly influence an employee’s base pay. In many countries, labour unions, the government, and employers work together to set minimum wage. The purpose of minimum wages is to protect employees from unduly low pay.
2. Geographic location
Companies have varied compensation structures and pay grades. These things are based on the organisation’s geographic location. Often, locations with high costs of living have higher base salaries than areas with low or average costs of living.
3. Education & skill sets
An employee’s basic salary is also dependent on the job’s required level of education and skill sets. Industries that require specialised knowledge and training, such as medicine and engineering offer more attractive base pay rates.
4. Personal profile
In addition to location and industries, the personal qualifications of a candidate can also determine the initial employers will agree to pay. An applicant with relevant work experience and good performance reviews may attract higher base pay than someone with subpar appraisals.
What is a gross salary?
Gross salary refers to the total employee compensation, including overtime pay, bonuses, benefits, and insurance. For both salaried and hourly employees, the calculation of gross pay is based on the agreed amount of base pay.
Example:
An employee gets a base pay of S$8,000, a monthly allowance amounting to S$300, and insurance and other benefits worth S$2,500. The total gross salary after factoring in the other items is S$10,800.
Here are the common components of gross pay or the things employees earn in addition to basic pay:
1. Overtime pay
Most companies pay their employees overtime once they exceed the 40-hour workweek. Under Singapore law, employees can only work up to 72 overtime hours in a month. The overtime pay is calculated depending on the employee category: monthly-rated, daily-rated, and piece-rated.
2. Commissions
Some jobs, such as sales representatives, real estate agents, insurance brokers, and more, earn commissions.
3. Bonuses
In some companies, employees receive bonuses for hitting certain targets like acquiring new clients, closing a large project deal or reaching pre-established benchmarks.
4. Reimbursement
Employers can also pay back employees for business-related expenses. For instance, if an employee went out on a business trip, the company will reimburse the payment made for lodging or meals.
Summing it up
When employees understand the differences between basic salary and gross salary, they can avoid being in a state of shock when seeing their payslips. In the case of payroll professionals, the terms don’t trouble them—the payroll process does.
To help your team streamline the HR processes and simplify complex payroll flows, invest in an HR software solution like Unit4 Prosoft.
Our Prosoft HRMS utilises a payroll processing module, which can take care of salary computations, statutory taxes, and other deductions whilst ensuring high payroll accuracy and compliance.
Contact us to learn more about how Unit4 Prosoft can help manage your company’s payroll.