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We often get the question of what is the difference between net and gross income. If you are self-employed, it is essential to know how to differentiate between these amounts. Hence, let’s focus our efforts on examining this topic today.

Difference Between Net and Gross Income

The gross amount on an invoice is the value of your work, without taking tax into account. And the net is the gross amount after applying the taxes.

I’m sure you’ll understand it much better with an example.

Example: how to calculate net and gross income

Let’s see an example with a web designer who wants to make an invoice to a client and win €1000 for his work. It is a Spanish company or self-employed client, so the invoice will be subject to withholding, another tax that we have to take into account.

In this situation, the values ​​would be:

VAT = 21%

withholding = -15%

net = gross + VAT – withholding

gross = net – VAT + withholding

So our calculations will be:

net = gross + 21%*1000 – 15%*1000 = 1000 + 210 – 150 = €1060

Hence, the net (the total of the invoice) would come out at €1060.

The net amount of €1,060 is what the designer charges in his invoice. For this invoice, he will pay VAT using form 303 at the end of the quarter. But in addition, the company to which he invoices must enter the amount of €150 of withholdings in his name. Our designer will recover this amount in the Renta statement of the year in which it is invoiced.

How do I charge: net or gross?

From what we just discussed, you are probably wondering if it really makes a difference if you get paid net or gross? The answer is yes, it matters.

We have done the calculation with an amount of €1000, but if we do it with €10,000, the difference instead of €60 already rises to €600. I don’t think anyone would be indifferent to €600 more or less.

Our recommendation

Whenever you sign a service contract with a company or professional, include that X gross euros will be charged (not including taxes).

But what if your client tells you: “Look, I can only pay you €1,000, including taxes.” That is, you want to close the deal on the net amount. In that case, to find out what amount you are charging for your services (the gross amount) I need you to read this article where we explain how to obtain the gross amount starting from the net in the different situations that you may encounter.

And to conclude…

In conclusion, net and gross are important terms to understand when it comes to business and accounting. It is important to understand the difference between the two in order to make the right decisions.

Therefore, as far as charging is concerned, sign your agreements with your clients, pointing out that you want to collect the gross amount. And since you already know the difference, it would not be bad to add between parentheses “gross (value of work excluding taxes)”.

Related articles

Calculate Invoice Taxable Base

How to Calculate The Price of Your Product?

How is net worth determined? (Spanish Tax Agency)