What is the difference between salary and payroll ?


SUMMARY

  • What is the difference between employer cost/payroll cost, employee gross salary, and employee net salary ?
  • I cover the concept, give an example and also explain the specifics in the GCC for this topic.
  • Watch the video to get the full training or read the transcript below

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FULL TRANSCRIPT

Hello and welcome to this episode of Compensation Insider.

Today, I’m going to talk about the difference between salary and payroll. I got that as a reader question, actually, a few years back, from one of my readers who was asking me,

“Kindly enlighten me on the difference between salary and payroll.”

Reader question

Some definitions

Salary refers to the compensation that an employee earns, or if you will, as a shortcut, the amount of pay that the employee receives. Salary is made of basic pay, and in some countries such as in the Gulf Cooperation Council region where I’m based, it also includes allowances that employees receive on a regular basis.

The gross salary means the employee income before the employee deductions and the employee income tax.

The net salary is the gross minus the employee deductions. Employeee deductions can be things such as social security deductions or end of service payment and so on.

The net net salary is the net salary minus the employee income taxes. It represents the net amount that the employee really earns once all the payments for social and income taxes have been made.

Payroll, by contrast, is the process by which salary is paid to employees. If we want to think of payroll costs, it means the sum of all employee salaries plus the employer contributions that might be requested from a legal point of view for healthcare, social security, and unemployment insurance and so on. So, it represents the real compensation costs that the employee represents for the employer.

An illustration of the difference between salary and payroll

In a lot of places, payroll costs are usually higher than the sum of salaries of all employees in the countries in the company. I’m going to give you a rough example in France.

Salary vs payroll

Let’s imagine an employee whose base pay is their salary because there are no allowances in the French system, generally speaking. So, let’s say they get 100.

The employer contributions represent about 50% of salary for mandatory payments to social security, healthcare, pension, and employment and so on. That’s what’s paid by the employer on behalf of the employee, but born by the employer.

The payroll cost is now 100 + 50 =150.

The employee net salary is their net pay, which is their salary minus their employee deductions for social security, healthcare, pension, and employment. As you can see, those social contributions have an employer side and an employee side. In France, let’s say employee social contributions represent 20 to 25% of the salary, so we’re going to take out 22%.

That means that the employee net is 100 minus 22, which is 78.

The employee net net is the net income minus the income tax that the employee is going to pay. Let’s imagine it’s another 20% from the base, and so that’s going to be 78 – 20 = 58.

We’re now in a situation where you see that the employer cost or the payroll cost is 150, the employee gross salary is 100, the employee net salary is 78 once you deduct the social security charges, and their net net income after income taxes is 58.

So, the employee sees that what’s coming in their pocket is 58, but the cost to the employer is 150 because the gross salary is 100. Those are not exact numbers and figures, obviously, but it’s just to give you an idea what the amounts could be for a single, mid-career level professional.

The specifics in the GCC

Of course, in the Gulf countries, things are a lot simpler.

There are very few mandated employer contributions or employee deductions. There might be healthcare, which is typically paid mostly by the employer. There’s also the End of Service Benefit, which is paid for through employer contributions for all expats.

Nationals of the GCC countries, such as the Saudis, Emiratis, Kuwaitis, Qataris, Omanis, and Bahrainis, have to pay pension contributions (instead of end of Service benefit). So, for Nationals, pensions are not paid for only by employers, but also via employee deductions (and government contribution).

However, those numbers are nothing compared to what we see, for example, in Europe. That means that in the GCC, payroll costs are much closer to the sum of salaries than in Europe, and the net net income is also much closer to the gross salary, given that the GCC currently doesn’t have income taxes, and the pensions scheme for the nationals is a low deduction of around five percent of the basic salary.

So, it’s very important to understand those different levels. They are all relevant and they all have a role to play.

I hope you found this information useful, and I look forward to seeing you next week. Thank you very much.

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