When it comes to purchases, salary negotiations, or receipts, “gross” and “net” are terms we come across in our day-to-day lives. Companies have to be careful how they use gross and net, and need to state them by the invoicing stage at the latest. Below, we will cover exactly what gross and net mean, what the difference is between gross and net prices, and what companies need to consider when invoicing.
What’s in this article?
- What is gross, 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, what is net?
Gross refers to an amount of money before any tax is 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 amortization. Since 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 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. Additionally, these are the only prices that really matter when they make their own purchases since companies only pay net prices ultimately. Unlike private individuals, companies are not charged value-added tax. They are able to deduct any VAT they pay for purchases and services from their value-added tax liability via deduction of the input VAT. So the VAT paid and the VAT liability are eventually settled accordingly.
Conversion of 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 euros ÷ 1.19 = net price 100 euros
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 euros ÷ 1.07 = net price 100 euros
The same process in reverse applies if you want to turn a net amount into a gross one.
To convert a net price into a gross price with a 19% value-added tax, multiply the net price by 1.19.
Example: Net price 100 euros x 1.19 = gross price 119 euros
To convert a net price into a gross price with a 7% value-added tax, multiply the net price by 1.07.
Example: Net price 100 euros x 1.07 = gross price 107 euros
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, at the latest, 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 UStG, value-added tax at 7% applies, according to Section 12 of UStG, to things such as food; books and magazines; local public transport; tickets for concerts; the theater 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.
It takes two simple steps to calculate any given tax amount. 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 euros ÷ 100) x tax rate of 7 = tax amount of 7 euros
Example: (Net price 100 euros ÷ 100) x tax rate of 19 = tax amount of 19 euros
The tax amount is then added 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 euros, as well as to invoices for larger amounts. In addition, standard invoices must also contain the following mandatory information according to Section 14 Paragraph 4 of UStG:
- 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 service was provided
- Serial invoice number
- Designation of the product or service
- Product volume or type and 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 euros in the previous financial year and whose revenue in the current financial year will not exceed 50,000 euros.
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 hits 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). The self-employed pay income tax proper, 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. It can be thought of as an advance monthly payment on the annual income tax liability. The level of employment tax will vary from case to case as it is adjusted to reflect the respective salaries and personal circumstances.
Health insurance: Section 193 of the German Insurance Contract Act (Versicherungsvertragsgesetz, abbreviated to VVG) has stipulated a general health insurance obligation 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 incorporates 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 euros per month or 59,850 euros per year. The additional amount is set by each health insurance provider, with the current average being 1.6%.
Pension insurance: Pension insurance is also mandatory for employees. 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, abbreviated to SGB). The contribution level for pension insurance amounts to 18.6% of gross salary—up to the contribution assessment ceiling of 7,100 euros per month in the new federal states of Germany and 7,300 euros 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 families with more than one child under 25 must expect deductions.
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 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 recognized 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.