(7) Why You Shouldn’t Agree Net Pay with Your Employee
When negotiating pay with employees, it is very important to agree gross rather than their ‘take home’ or ‘net’ pay. This is because the tax credits, allowances and reliefs that each employee is entitled to vary significantly depending on the employee’s individual circumstances. Factors such as whether they have a second job, whether they split their tax credits with a spouse and whether they owe back taxes to Revenue all affect their tax liability.
An employee’s tax position can also change during the course of their employment if their personal circumstances change—for example if they switch from being taxed as a single person to being taxed as a couple.
So, why does this matter from an employer’s point of view?
The problem for employers is that agreeing net pay with an employee means that the cost can fluctuate significantly if the employee’s tax circumstances change.
Say, for example, Employer 1 takes on a new part-time employee who has a second job. Employer 1 agrees a net salary with the new employee but the employee then decides to transfer all of their tax credits and cut-offs to Employer 2. This will boost their ‘take home’ pay from Employer 2 without affecting their ‘take home’ pay from Employer 1. While the employee in this example will be better off, Employer 1 could end up hundreds (or even thousands) of euro out of pocket over the course of a year.
Employees can also lose out in net pay agreements. Say, for example, the Government announces an increase to personal income tax credits or cut-offs in the Budget. Employees who are paid based on an agreed gross wage will get the benefit of these increases however employees on an agreed net wage will continue to receive the same amount of net pay as before the Budget.
Agreeing ‘net’ or ‘take home’ pay often turns out to be an expensive mistake. The key message for employers is that agreeing a gross salary means that the cost to you is predictable and will not change even if your employee’s personal circumstances change.
If you need help to set up or manage your weekly or monthly payroll, contact GroForth for details of our payroll services.