Calculating Net-to-Gross Payments

This chapter provides overviews of net-to-gross processing and the process sequence.

Note. The PeopleSoft system delivers a query that you can run to view the names of all delivered elements designed for Australia. Instructions for running the query are provided in the PeopleSoft Enterprise Global Payroll 8.9 PeopleBook.

Understanding Net-to-Gross Processing

Net-to-gross processing (also called a gross-up) is required when you want to pay a payee a specific net amount. Starting with the net amount, the system determines the gross amount to process so that the required net amount remains after all tax deductions have been made.

The following sections describe the main features of the net-to-gross functionality. They describe the process step-by-step and provide an example calculation.

Note. This chapter collectively refers to annualized tax, HECS, and SFSS as tax deductions, except references to specific deductions are necessary.

Net-to-Gross Earnings Elements

This feature has two earnings elements. The first is the BONUS NET earnings element, which is used to pay the net amount. The PeopleSoft system provides this element as a sample because a fixed bonus amount is a typical pay component that must be grossed up.

Enter a bonus amount using positive input. The system calculates the amount by which it needs to gross up the net to have the required net after deducting taxes. It then assigns that amount to the BONUS GRS UP earnings element. The two earnings elements constitute the gross pay. The BONUS GRS UP earnings amount is equal to the amount of the tax deductions. Both earnings elements are assigned to the EARN - OTHER section in the AUS PAYROLL process list. Here is a summary of the earnings elements:

BONUS NET + BONUS GRS UP = Gross Pay
BONUS NET = Net Pay
BONUS GRS UP = Tax Deductions

Determining That a Net-to-Gross Calculation Is Required

When the BONUS NET earnings is resolved, it adds to a gross-up accumulator. In another section, lower in the process list, a conditional formula determines that grossing up is required if the gross-up accumulator has a value.

Understanding Actual Net Pay and Target Net Pay

The gross-up process creates an actual net pay amount. This is stored in another accumulator. The system compares the target net pay amount with the balance in that accumulator, and when they are the same, the process of calculating the gross pay is complete.

Calculating the BONUS GRS UP Earnings

After the system determines that a gross-up is required, it starts the calculation by treating the target net as if it were the gross pay. It processes that gross amount, deducting taxes, and retrieves a new net amount—the actual net. Because of the tax deduction, the actual net doesn’t match the target net. Using the difference between actual and target net in a formula, the system calculates a new gross amount, deducts the taxes from it, and arrives at a new actual net which it again compares to the target net. The iterations—or loops—continue, with the actual net nearing the target net with each loop, until the actual and target net are the same.

The loop formula is:

((1 – (net ÷ gross)) × difference) + current BONUS GRS UP + difference = new BONUS GRS UP

Understanding the Process Sequence

This section explains the process step-by-step and provides an example.

Processing Sequence

This section discusses the processing sequence.

User enters the bonus amount by positive input as the earnings BONUS NET.
BONUS NET earnings element is resolved in the EARN - OTHER section, and it adds to accumulator GUP AC EARNINGS.
The EARN - GROSS UP subprocess section in the AUS PAYROLL process list has the conditional formula GUP FM CALC REQUIRED; if the formula determines that the GUP AC EARNINGS accumulator is not 0 and that a gross-up is required on the BONUS NET earning, it invokes the EARN - GROSS UP subprocess section.
The formula GUP FM TARGET NET, the first element in the EARN - GROSS UP section, sets the variable GUP VR TARGET NET to the value of the GUP AC EARNINGS accumulator (the BONUS NET amount).

This value remains constant during subsequent processing.
The section GUP TAX DEDUCTIONS—the second element in the EARN - GROSS UP section—runs the formula GUP FM SET AMOUNTS which sets three tax variables (TAX VR ANNUALISED, TAX VR HECS and TAX VR SFSS) to the value of the GUP AC EARNINGS accumulator (the BONUS NET amount).

The three tax deductions are calculated on these amounts.
The GUP TAX DEDUCTIONS section runs the three tax deduction calculations for ANNUALISED TAX, HECS, and SFSS.
The conditional formula GUP FM COMPARE NET in the EARN - GROSS UP section compares the constant value of GUP VR TARGET NET (set at step 4) with the value of the GUP AC NET accumulator, from which the three tax deductions subtract and to which the GUP AC EARNINGS accumulator adds.
If the formula returns False, no difference exists between GUP VR TARGET and GUP AC NET, and the process stops.

If the formula returns True, the formula GUP FM ALTER GROSS runs and determines a new BONUS GRS UP value. The BONUS GRS UP value is the amount by which the net is increased to achieve a taxable gross.
The GUP TAX DEDUCTIONS section resets the three tax variables to the new balance in the GUP AC EARNING accumulator, which now contains the original BONUS NET value and the new BONUS GRS UP value.

The tax deductions are calculated to produce a new actual net.
This loop—calculating a new gross, then deducting the taxes to achieve a new balance in the GUP AC NET accumulator, and comparing it to the constant GUP VR TARGET NET—continues until the actual net is equal to the target net.
When the looping stops, formula GUP FM CHECK AMT runs and verifies that the GUP FM COMPARE NET formula has resolved to False, indicating that the system has calculated the correct gross-up figure.

If it returns True, the payee calculation of BONUS returns an error and a message is sent to the Payee Messages. The system is initially set to a maximum of 15 iterations (you can change this value in the Maximum Iterations field on the Section Definition page). If the system fails to correctly calculate the gross amount within the limit, you must remove the BONUS NET earning amount, calculate the gross manually, and pay it as another type of earnings.

Calculating the BONUS GRS UP Earnings and the Gross Pay

The following example is based on a positive input entry of 500 to the BONUS NET earnings element. The 500 becomes the value of GUP VR TARGET NET.

Note. In this section, all amounts are in AUD.

For this example, tax deductions are a flat amount of 20 percent; therefore, the first time that the GUP TAX DEDUCTION section is called, it calculates tax deductions of 100.

The conditional formula, GUP FM COMPARE NET, resolves to True as the target net is 500 and the actual net is 400. The looping process begins:

First Loop

The difference is calculated by subtracting the actual net from the target net.

500 − 400 = 100.00

The gross amount is increased at the first attempt to find the eventual BONUS GRS UP earnings amount using the following calculation:

((1 − net/gross) × difference) + current BONUS GRS UP + difference

((1 − 400/500) × 100) + 0 + 100 = 120 (new BONUS GRS UP)

The gross is increased on the first loop by 120 and is now 620.

Tax is deducted from the gross of 620 and the new net is 496.

The target net of 500 is compared to the actual net of 496.

As the amounts are not equal, and the correct gross has not been found, a second loop occurs.

Note. The GUP AC EARNINGS accumulator is “self correcting” which means that the previous value is “reversed out” and the new value added. The accumulator can adjust up or down as needed. This occurs for each loop in the process.

Second Loop

The difference is calculated by subtracting the actual net from the target net.

500 − 496 = 4

The gross amount is increased at the second attempt to find the eventual BONUS GRS UP earnings amount using the following calculation:

((1 − (net ÷ gross)) × difference) + current BONUS GRS UP + difference

((1 − (496/620)) × 4) + 120 + 4 = 124.8 (new BONUS GRS UP)

Gross is increased by 124.8 to 624.80.

Tax is deducted from the gross of 624.80, and the new net is 499.84.

The target net of 500 is compared to the actual net of 499.84.

Because the amounts are not equal, the correct gross has not been found, so a third loop occurs.

Third Loop

The difference is calculated by subtracting actual net from the target net.

500 − 499.84 = 0.16

The gross amount is increased at the third attempt to find the eventual BONUS GRS UP earnings amount using the following calculation:

((1− (net ÷ gross)) × difference) + current BONUS GRS UP + difference

((1 − (499.84/624.8)) × 0.16) + 124.8+0.16 = 124.99 (new BONUS GRS UP rounded to two decimal places)

Gross is increased by 124.99 to 624.99.

Tax is deducted from the gross of 624.99, and the new net is 499.99.

The target net of 500 is compared to the actual net of 499.99.

Because the amounts are not equal, the correct gross has not been found, so a fourth loop occurs.

Fourth Loop

The difference is calculated by subtracting the actual net from the target net.

500 − 499.99 = 0.01

The gross amount is increased at the fourth attempt to find the eventual BONUS GRS UP earnings amount using the following calculation:

((1− (net ÷ gross)) × difference) + eventual BONUS GRS UP + difference

((1− (499.99/624.99)) × 0.01) + 124.99 + 0.01 = 125.00 (new GBONUS GRS UP rounded to two decimal places)

Gross is increased by 125 and is now 625.

Tax is deducted from the gross of 625, and the new net is 500.

The target net of 500 is compared to the actual net of 500.

The compare formula now resolves to False, and the looping process ceases. At this point:

Gross pay is 625.
Net pay is 500.
BONUS GRS UP is 125.
BONUS NET is 500.