This often causes confusion—and quite understandably so. The total amount on the invoice sent to the client and the salary paid into your account are not the same thing, because the entire invoiced amount is not your personal income.
Taxes and other deductions are first subtracted from the invoice total, and only then is the net pay calculated.
Here's how money flows from an invoice to a paycheck
1. The customer pays the total amount of the invoice
The total amount on the invoice is the amount the customer pays. It may include value-added tax (VAT), which we remit to the tax authorities.
2. The portion that affects the salary remains
Once value-added tax and service-related expenses have been taken into account, the remaining amount (gross pay) is used to calculate the salary.
3. Statutory deductions are made from the gross salary
The following are deducted from gross pay, for example:
- Withholding tax based on your tax card
- health insurance contribution
- other applicable statutory fees
4. Your net pay will be deposited into your account
The result is your take-home pay—the amount that is deposited into your bank account and is available for you to use.
When pricing your work, think in terms of the net amount
If you're aiming for a specific amount in your account, the price you charge must be higher than that. This way, you'll avoid surprises and actually end up with a profitable return on your work.