2. From gross pay to net pay

At first glance a payslip looks like a jumble of amounts, codes and abbreviations. Even so, there is a logical structure behind it, and it follows a fixed order. Once you see that order, you can explain every line, including to the employee standing at your desk with it.

What gross pay consists of

Gross pay is the starting point of every salary calculation: the amount you agree with your employee before any deductions. But that single figure from the employment contract is rarely the whole story. A payslip usually shows several items that together make up the gross pay for the period.

The fixed pay components are the components that recur in every pay period. The basic salary is the agreed pay for the period based on the contract hours: for a full-time employee the full monthly salary, for a part-time employee a proportionate share. Added to that is the holiday allowance, by law at least eight per cent of gross pay; you usually set this aside monthly and pay it out in May or June, although some employers choose to pay it out monthly. A thirteenth month or year-end bonus is an extra period's pay that is normally paid out in November or December, if the collective agreement or the employment contract provides for it. And finally there are the fixed allowances: a shift allowance, a job-related allowance or a personal allowance above the collective agreement wage.

In addition there are the variable pay components, which vary by period and make the January payslip different from the February one. Overtime is the hours worked above the contract hours, often with a supplement percentage such as 125 or 150 per cent. The irregular hours allowance applies to work in the evenings, at night, at weekends or on public holidays; the percentage is usually set out in the collective labour agreement. Bonuses and commissions are one-off or periodic payments based on performance, turnover or results. The part of the travel allowance that exceeds the tax-free threshold counts as gross pay. And benefits in kind are added at their taxable value, for example the addition to taxable income for a company car.

Taxable wage, SV wage and Zvw wage

Before you can calculate anything, you need to know what you are calculating on. That is not always the full gross pay. On the payslip you come across three wage concepts that you have to keep apart. The wage for payroll tax purposes, also known as the taxable wage, is the amount on which you calculate wage tax and national insurance contributions; the company car addition is included in it, but the employee's pension contribution has already been deducted. The wage for employee insurance contributions, the social insurance pay (SV-loon), is the basis for the WW and WIA contributions and for the Zvw contribution. That pay is usually almost the same as the taxable pay, with a few exceptions, for example in the case of the WW franchise or special payments. The pay for the Health Insurance Act (Zvw) is, finally, the amount on which the employer's Health Insurance Act levy is calculated; for most employees it is the same as the social insurance pay, up to the maximum contribution wage.

The deductions

Gross pay is what your employee earns on paper, not what appears in their bank account. In between are the deductions. Some of these are required by law and are paid over to the Belastingdienst, others follow from collective labour agreement or company arrangements, such as pension.

The largest item is almost always the payroll tax. This is a collective term for two deductions that appear together on a single line: payroll tax, a tax withheld in advance of income tax that is settled later in the tax return, and national insurance contributions for AOW, Anw and Wlz. The two are shown together because they have the same basis and the same rate. The rate rises in bands, and the Belastingdienst publishes new tables each year. You use the white table for regular pay from current employment and the green table for benefits and pay from former employment.

The payroll tax would work out high if there were no tax credits applied. Every taxpayer is entitled to the general tax credit, and anyone in work also receives the employed person's tax credit. These credits reduce the amount you withhold. Important: you apply the payroll tax credit with only one employer at a time. If someone works for two employers, the employee chooses where. You record this in the payroll taxes details statement.

The seven steps at a glance

Now that you know which deductions apply, you put them in the right order. That order is prescribed by the Belastingdienst. If you depart from it, the net amount will not be correct and you run the risk of your payroll tax return being rejected.

Step 1, determining the gross pay. Start with the agreed gross salary for the pay period. Add holiday pay, a thirteenth month or a one-off payment if these are paid out in this period.

Step 2, adding up the additions. If your employee has a company car that is also used privately, you add the taxable addition to their pay. The same applies to other benefits in kind, such as a phone or bicycle that does not fall under a specific exemption.

Step 3, deducting the employee's pension contribution. The part of the pension contribution that your employee pays himself is deducted before you calculate payroll tax, because that contribution is deductible for wage tax purposes.

Step 4, determining the pay subject to payroll tax. What you are left with is the basis on which you calculate the payroll tax: the taxable pay.

Step 5, withholding payroll tax. You look up the correct amount in the white or the green table. White for wages from current employment, green for benefits and pensions. You only apply the payroll tax credit if the employee has opted for it.

Step 6, withholding the Zvw contribution where this applies. In most situations you, as the employer, pay the employer's Zvw levy yourself and withhold nothing. For some groups, for example directors and majority shareholders or certain benefit recipients, you do withhold the employee's Zvw contribution from their pay.

Step 7, processing the other deductions. Think of a wage attachment, a loan your employee is repaying or the personal contribution for a lease car. What remains is the net pay you transfer.

Employer costs are not included

What your employee receives net is only part of the story. On top of the gross pay, you as the employer also pay the employee insurance contributions (WW, WIA, ZW) and the employer's Zvw levy. Those amounts do not appear on your employee's payslip, but they do appear on your payroll cost overviews and in your payroll tax return. For an average employee, the syllabus works with roughly twenty to thirty per cent employer costs on top of the gross pay. For Sanne in the example, a gross salary of 3,500 euros therefore quickly costs you 4,300 to 4,500 euros per month.

Explaining the payslip

For many employees, the payslip is an opaque document. When you are explaining something to a new employee, after a pay rise or when questions come up about holiday pay, it helps if you know exactly where each figure comes from.

By law, a number of details must be shown: the name of the employer and the employee, the pay period, the gross pay and how it is made up, all deductions specified, the net pay and the amount actually paid out, the statutory minimum wage that applies to this employee, and, where pay is hourly, the number of hours worked. In addition, cumulative totals are almost always shown: the total gross pay, payroll tax withheld and holiday pay accrued since the start of the calendar year.

If you are explaining a payslip, work in the same order as the calculation itself. First what comes in, then what goes out, and lastly what remains. Start with the gross pay and explain any differences straight away: a pay rise, a back payment, a correction from last month. Then the special remuneration: holiday pay, thirteenth month, bonus. These are often taxed at the special rate, which looks higher than the rate on regular pay. Then the taxable additions, and make clear that a taxable addition is only a calculation item for tax purposes; your employee does not actually receive that money. Next the deductions: pension contribution, payroll tax and, where applicable, the employee's Zvw contribution. This is where you get most questions, so explain that payroll tax is a prepayment on income tax and that the pension contribution is deductible. Then the net allowances, such as travel expenses or a working-from-home allowance, which are added to net pay untaxed. And finally the net pay and the payment, which sometimes differs from the sum total because of an advance or a wage attachment.

Summary

• Gross pay consists of fixed components (basic salary, holiday allowance, thirteenth month, fixed allowances) and variable ones (overtime, unsocial hours allowance, bonus, excess travel expenses, pay in kind).
• Keep three pay concepts apart: taxable pay, social insurance pay (SV-loon) and pay for the Health Insurance Act (Zvw). The difference usually lies in a pension contribution or an addition to taxable income.
• The order is fixed: gross pay, add the additions, deduct the employee's pension contribution, wage for payroll tax purposes, deduct payroll tax, then the Zvw contribution if applicable, then the other deductions. What remains is the net pay.
• The white table applies to current employment, the green one to benefits and pensions. You apply the payroll tax credit with one employer at a time.
• Employer's charges (WW, WIA, ZW and the employer's Zvw levy) fall outside the gross-to-net calculation, but do count towards your wage costs.
• A payslip must show the gross pay, all deductions, the net pay, the pay period and the applicable minimum wage.
• The special rate on holiday pay and bonuses looks high, but it is settled through income tax.
• Every rate and every threshold in this chapter changes each year. Check them with the Belastingdienst.