When it comes to purchases, salary negotiations or receipts, "gross" and "net" are terms we come across in our day-to-day lives. Companies need to be careful in how they use the two terms, and state gross and net by the invoicing stage at the latest. In this article, we will cover what gross and net mean, the difference between gross and net prices, and what companies need to consider when invoicing.
What's in this article?
- What is gross and what is net?
- What is the difference between gross and net prices?
- What do companies need to consider when invoicing?
- What is the difference between gross and net salary?
What is gross and what is net?
Gross refers to an amount of money before any tax has been deducted. In other words, the amount has not yet been adjusted to reflect any deductions. By contrast, net describes the adjusted amount following deduction of taxes and any depreciation or amortisation. As the net amount does not include any taxes, it can never be more than the gross amount.
What is the difference between gross and net prices?
When someone buys goods or pays for a service, the invoice shows a net price and a gross price. The gross price is the one that the customers ultimately have to pay. In addition to the lower net amount, the gross price also includes the value-added tax. Private individuals should pay particular attention to the gross price when shopping as this is what they will pay at checkout.
For companies, however, the net price is what really counts. VAT-registered companies base their pricing on net prices. These are also the only prices that really matter when they make their own purchases as, ultimately, companies only pay net prices. Unlike private individuals, companies are not charged value-added tax. They can deduct any input VAT that they've paid for purchases and services from their value-added tax liability. This means that the VAT paid and the VAT liability are balanced over time.
Converting between gross and net prices
To convert a gross price with a 19% value-added tax into a net price, divide the gross price by 1.19.
Example: Gross price €119 ÷ 1.19 = net price €100
To convert a gross price with a 7% value-added tax into a net price, divide the gross price by 1.07.
Example: Gross price €107 ÷ 1.07 = net price €100
Reverse the process if you want to turn a net amount into a gross one.
To convert a net price into a gross price with 19% value-added tax, multiply the net price by 1.19.
Example: Net price €100 × 1.19 = gross price €119
To convert a net price into a gross price with 7% value-added tax, multiply the net price by 1.07.
Example: Net price €100 × 1.07 = gross price €107
What do companies need to consider when invoicing?
Companies are obliged to issue invoices to other companies and legal entities that are not businesses within six months of providing the relevant service. This obligation does not apply to private individuals, unless the service is associated with land (see Section 14 of the German VAT Act, or Umsatzsteuergesetz – abbreviated to UStG).
The information on the invoice must be complete and correct. However, this can prove tricky when the question of gross and net arises. It is not unusual for the wrong tax rate to be used or for other errors to creep in when calculating the tax amount.
The net amount to be invoiced for a product or service is the starting point for any calculations. Depending on the net amount, either the regular tax rate of 19%, the reduced rate of 7% or a rate of 0% will apply. According to Section 12 of the UStG, value-added tax at 7% applies to things such as food, books and magazines, local public transport, tickets for concerts, the theatre or museums, and live animals. VAT-exempt goods and services, for which a tax rate of 0% is shown, include items such as insurance policies or intermediary services for loans. Apart from these exceptions, a VAT of 19% applies to most products and services.
Any given tax amount can be calculated in two simple steps. First, divide the net amount in question by 100 to get 1% of this amount. Then multiply that number – depending on the tax rate – by 7 or 19.
Example: (Net price €100 ÷ 100) × tax rate of 7 = tax amount of €7
Example: (Net price €100 ÷ 100) × tax rate of 19 = tax amount of €19
Then add the tax amount to the net price to get the gross price.
A gross amount and a net amount must be visible on every invoice issued by a company. This applies to small-value invoices with a maximum total amount of €250, as well as to invoices for larger amounts. Standard invoices must also contain the following information according to UStG Section 14, Paragraph 4:
- Name and address of the invoice issuer
- The issuer's tax number
- The issuer's VAT identification number
- Name and address of the invoice recipient
- Invoice issue date
- Time and date that the service was provided
- Serial invoice number
- Designation of the product or service
- Product volume or type, plus scope of service
- Net amount
- Tax rate and amount
- Gross amount
- Possibly an additional note regarding the exemption for small businesses
Note: Small businesses are exempt from any value-added tax liability. Because of this, they only ever issue their invoices with the net amount and never with the gross amount, which would include value-added tax. Small businesses include freelancers, entrepreneurs or self-employed people who earned a maximum of €22,000 in the previous financial year and whose revenue in the current financial year will not exceed €50,000.
Companies may use the services of certified payment service providers for invoicing purposes. These offer automated processes, based on smart invoicing programs, and vastly reduced error rates for processes such as calculating the tax amount.
What is the difference between gross and net salary?
Employees will soon notice the difference between gross and net salary if they compare the salary stated in their employment contract with the money that actually arrives in their bank account. The employment contract usually shows the gross salary, while the net salary is paid to the account. Employers have to deduct part of the gross salary, in the form of taxes and social security contributions, and then remit this to the tax office or social security provider. The remaining net salary is paid to the employees.
You can calculate how high your tax deductions will be online. The German Federal Ministry of Finance provides an online calculator for calculating employment tax and social security contributions. This allows you to determine your net salary from the gross salary. You just need to state the type of employment, the gross annual salary and any pension contributions. The calculator makes a distinction between spouses or registered partners in a joint tax relationship, and single people. An income tax calculator is also available for the self-employed and freelancers.
Gross salary consists of net salary, taxes and the employee share of any social security contributions. These break down as follows:
Employment tax: a universal tax, known as income tax, is applied to the income of all natural persons in Germany. The legal basis for this is the Income Tax Act (Einkommensteuergesetz, abbreviated to EStG). Self-employed people pay income tax, while employees pay an equivalent known as employment tax. Employment tax is a particular form of income tax that companies forward to the relevant tax offices. Think of it as an advance monthly payment on the annual income tax liability. The level of employment tax varies from case to case as it is adjusted to reflect individual salaries and personal circumstances.
Health insurance: Section 193 of the German Insurance Contract Act (Versicherungsvertragsgesetz, abbreviated to VVG) ensures a general health insurance obligation, which has been in place since 2008. Anyone who is domiciled in Germany is obliged to take out a private or statutory health insurance plan. Employers and employees – as is the case with pension, unemployment and long-term care insurance – split the costs between them equally. The level of the health insurance contribution includes both a basic and an additional amount. The basic amount is the same for all health insurance providers and equates to 14.6% of gross salary – up to the contribution assessment ceiling of €4,987.50 per month or €59,850 per year. The additional amount is set by each health insurance provider, with the current average being 1.6%.
Pension insurance: employees are also required to have pension insurance. In addition, certain groups of self-employed persons, apprentices, people raising children, and others may be obliged to take out insurance according to the Sixth Book of the German Social Code (Sozialgesetzbuch (SGB)). The contribution level for pension insurance amounts to 18.6% of gross salary – up to the contribution assessment ceiling of €7,100 per month in the new federal states of Germany and €7,300 per month in the old federal states.
Unemployment insurance: From gross salary, 2.6% is allocated to unemployment insurance. The contribution assessment ceiling is based on the figures associated with pension insurance. According to Section 25 in the Third Book of the SGB, all employees – regardless of their salary level – are obliged to take out insurance. Those in part-time employment are excluded from unemployment insurance (according to Section 27 Paragraph 2 in the Third Book of the SGB).
Long-term care insurance: All those with statutory health insurance are automatically covered under long-term social care insurance as well. People with private health insurance may take out a private long-term care insurance plan. The contribution rate is 3.4% of gross salary. People with no children receive a supplement of 0.6%, while deductions are made for families with more than one child under 25.
Accident insurance: Another branch of social security is accident insurance. Employers must take out and pay for this mandatory insurance via the statutory insurance institution to which they are affiliated. This means that employees have statutory insurance coverage for workplace and commuting accidents – without having to bear the costs themselves. The contribution for accident insurance is 1.6% of gross salary. Self-employed people are able to take out private accident insurance.
Church tax: Church members fund their church through the church tax. Anyone who is a member of a recognised church pays 9% (8% in Bavaria and Baden-Württemberg) of employment or income tax to the church. The church tax is collected by tax offices and forwarded to churches.