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The Pitfalls of agreeing a net wage salary

Posted in: All / Posted on August 11, 2015

In many industries, net-wage agreements are surprisingly common. But a net wage agreement can have serious financial implications for both the employer and the employee.

By agreeing a net salary the employer is essentially writing a blank cheque – committing to pay ALL tax and PRSI contributions on behalf of their employee, irrespective of any changes in the legislation and without taking into account his or her individual tax code or tax position.

The difference between a net and a gross wage can be as much as 60%.Premier Accounts Assist has encouraged all clients to always discuss and agree salaries in gross terms , yet we frequently receive calls from potential employers who are unaware of the real cost involved with the net wage pitfall. Once they find out that the real cost, many realise they can’t afford to employ them at all, or they decide to only declare part of the salary in an attempt to save money, which not only is illegal but also has real-life implications for the employee.

Consider the following: If you agree a net salary of €500 per week the gross salary would be approximately €608*, but in addition to the tax and PRSI you must also pay employer’s PRSI contribution, which in this instance would be approximately €65, bringing the total cost to €673. The difference between the agreed net pay and the real cost is 34%. For many employers that is too much, and they may realise they can’t afford to keep their employee.

*The above scenario is based on an individual on a standard tax credits and cut-off point.

If the employee is not on a standard tax code, is on emergency tax or there is unpaid or underpaid tax from previous employment, it could become even more expensive.

Now consider the same net wage scenario but your employee has decided to hand over their tax credits and SRCOP to their spouse. The net salary of €500 now means they have earned a gross wage of €728 PLUS employer PRSI of €78.20, bringing the total to €806.20. A percentage cost of 61%

Employers should always discuss wages with potential employees in terms of GROSS SALARY as it is not up to the employer to worry about what the employee is taking home. It has been a costly lesson for many employers.

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