Net to Gross Calculation Method

To calculate an employee's gross salary from an agreed net amount, the system needs the following information:

  • All basic earnings that the employee receives based on professional category or the salary plan. This information is on the Job Data - Compensation page.

  • The total number of periods.

  • An estimate of the gross salary. This figure is used as the starting point for the iterative calculations. By default, the system calculates the estimated gross by annualizing the net amount and increasing the result by 30 percent to cover statutory deductions. You can override this percentage to get a more accurate starting point for the calculation by changing the value of the variable AJN VR TAX PCT EST. For example, to set the percentage to 20 percent, you would assign 1.20 to the variable.

Note: The net to gross process considers only social security and tax deductions. Other deductions, such as loans and advances, garnishments, and union fees, are not included in the calculation loop because they are applied to the net.

To obtain the annual gross salary, the system:

  1. Calculates the estimated gross salary.

  2. Calculates the net amount from the estimated gross.

    To accomplish this, the system:

    • Divides the estimated annual gross by the total number of periods to calculate all the monthly gross earnings.

    • Subtracts the tax deductions from the monthly gross. The system calculates the IRPF deduction for that income.

    • Subtracts the social security contribution from the monthly gross.

  3. Determines the difference between the calculated net and the actual net.

    The system uses this formula to calculate the difference:

    Agreed Net − Calculated Net = Difference

    If the difference is 0,05 EUR or less, the estimated gross amount is considered to be accurate and the calculation is complete. If not, the process continues to step 4.

    Note: You can define the acceptable variation between the agreed net and the calculated net by customizing the variable AJN VR TOLERANCIA. PeopleSoft Global Payroll for Spain delivers the value of the variable as 0,05 euros, but you can change this value during implementation.

  4. Calculates a new estimated gross amount.

    Using the difference calculated in step 3 and the following formula, the system calculates a new estimated gross amount:

    New Estimated Gross = Estimated Gross + Difference + (Difference * (1 – (Calculated Net / Estimated Gross)))

  5. Recalculates the net from the new estimated gross (repeat step 2).

    The system repeats step 2 to recalculate the net from the new estimated gross. Steps 2 through 5 are iterative and can occur up to five times. If the difference between the calculated net and the actual net (calculated in step 3) is more than 0,05 EUR after five attempts, the system ends with the fifth calculation.

    Note: This iterative process is required because changing the estimated gross can affect the seniority amount, the prorated extra period, the absorbable complement, and social security contributions. More important, the tax percentage can change, producing a different deduction.

Note: To specify that an employee's earnings must be adjusted net to gross, assign a supporting element override to variable GEN VR TIPO AJ SAL with a value of NETO.

Note: The IRPF percent is calculated every month for net to gross employees, even if the corresponding normalization schedule doesn't set it up.

See Understanding Tax Calculation.

Example

According to his contract, Jose earns a monthly net payment of 1.500,000 EUR. His labor agreement stipulates 14 periods per year. Following the preceding steps, the system:

  1. Calculates the estimated gross amount: 1500 * 1,3 = 1950 ( Net amount increased by 30 percent).

  2. Resolves all basic earnings and calculates the absorbable complement, taking into account the estimated monthly gross amount and the total of all basic earnings.

  3. Subtracts the tax deductions from the total monthly gross.

    Assuming a tax rate of 12,12 percent, this deduction is 236,34.

  4. Subtracts the social security contribution from the monthly gross.

    Assuming that after the system calculates the social security base, the contribution is 53,30. The monthly net is 1950 – 236,34 – 53,30 = 1660,36.

  5. Determines the difference between the calculated net and the actual net: 1660,36 − 1500,00 = 160,36 EUR.

  6. Because the difference is greater than 0,05 EUR, the system calculates a new estimated gross and repeats this process until this value is within an accepted range of the actual net.