Gross Pay

What is Gross Pay?

Gross pay is the total amount of money earned per paycheck, comprising all earnings before any deductions or withholdings occur. Usually, this paid amount mentions an employee's standard pay rate or salary, including any overtime during a pay period. 

When we receive our paycheck from our employer, almost all of us notice one thing in the salary: a section called gross pay. Have you ever wondered what it is? We will discuss it throughout the article.

This payment is essential, and every employee should know how to calculate it. Understanding how to calculate gross pay helps employees gain insight into their total earnings and provides an idea of how accurately they are compensated for their hard work.

In other words, gross pay is the amount of the wage or salary an employee earns before any contributions or deductions are made from the gross earnings. Therefore, it is also known as (gross income) or (gross salary). 

It is considered an individual's total income before subtracting federal Medicare and Social Security taxes, income tax, state and local income taxes, retirement contributions, health and dental insurance premiums, contributions to flexible spending accounts, and other obligations.

Employees use their gross pay to cover rent, electricity, mortgages, etc. The definition remains unchanged whether the employee gets paid weekly, bi-weekly, or monthly. 

However, the employee's compensation on each check may change based on their performance. For example, if employees work overtime every day, this will affect their pay.

Gross Pay Vs. Net Pay

Some people believe gross and net pay are the same but have differences.

Net pay, or take-home pay, is the amount an employee receives after deductions are made from their gross pay. That's why it is also known as (take-home money). Gross pay is different from this.
As we have already discussed, pay is an individual's total income before deductions. Employees only have access to their pay to pay their bills.

Gross salary is an employee's total income before deductions, including base salary and additional earnings such as commissions. Net pay is the amount employees receive after deductions such as taxes, insurance premiums, and other withholdings are subtracted from their gross pay.

Calculating Gross Pay

Gross salary can be described in many ways and is calculated in financial documents. But first, it is the pay you offer employees when you hire them.

For example, a gross salary of $30,000 may include bonuses or additional earnings, but it's important to specify whether this amount is the total gross pay or the base salary before bonuses.

Determining gross pay involves dividing the annual salary by the number of pay periods and adding any additional income earned during that period, such as commissions or bonuses.

• Weekly payment: divide by 52 (number of weeks in a year)
• Biweekly payment: divide by 26 (every two weeks)
• Semimonthly payment: divide by 24 (twice a month)
• Monthly payment: divide by 12 (number of months in a year)

For hourly payment, the formula would look like the below

Gross pay = (Hourly rate x The number of hours worked in a pay period) + Additional sources of income like overtime, tips, commissions, etc. 

Understanding which payroll components are included in gross pay calculations and which are not is crucial for accurate compensation management. Employees should be mindful of the agreed-upon pay, as it reflects the amount employers committed to paying them for their contributions to the company.

The employer and employee must agree on the amount before signing the employment or other contracts. This way, both parties will know what to expect regarding payment for particular works.

How to Calculate

The employer's payroll system often automates salary calculations but can also be manually computed if needed. The calculation is straightforward and can be easily computed manually or automatically.

This calculation is used both manually and automatically in Excel. It can be expressed manually as below: 

1. Analysis of the Employees' Salary 

Employees can also calculate their salary by themselves to confirm their salary amount. The basic formula for manual calculation is:

Gross pay= Annual salary payment / Number of payment periods

For example, if an employee earns $120,000 annually and receives 12 paychecks throughout the year, then according to the formula, they would receive $10,000 per paycheck.

2. Hourly Calculation

The formula for hourly calculation is expressed as:

Gross pay = Hours worked in a pay period × Hourly rate (+ Overtime hours × Hourly overtime rate)

According to the formula for hourly payment, when an employee works 80 hours in a pay period with an hourly rate of $62.50/hour, the gross pay for that pay period would be $5,000.

Payroll Deductions

Gross income is the amount employees get before payroll deductions. Payroll deductions are divided between deductions handled by the employer, such as certain taxes, and deductions taken from the employee's paycheck, such as retirement contributions and insurance premiums.

Taxes and Fees are:

• Payroll Taxes: Payroll tax consists of four of the most common taxes such as social security, federal income tax, unemployment, and Medicare
• Social Security Taxes: Social Security tax is split between employees and employers, with each contributing 6.2%, totaling 12.4% of the employee's wages
• Medicare: Every employed individual must pay a rate of 1.45% into Medicare from their pay
• Retirement and Insurance: Employees contribute to retirement and insurance, and these costs are paid from their pay. Such payments are valuable as they will bring benefits following retirement
• Health Insurance: Many employed individuals opt for health insurance plans, with premiums often deducted from their paychecks, but not all employees may require or choose to participate in such plans
• Life Insurance: Life insurance usually changes depending on the employee's job situation. The limit of life insurance expires when the employee changes jobs
• Retirement Investments: Employees may participate in retirement investment plans such as 401(k), offered by many employers, to accrue benefits for retirement

Gross Pay at Tax Time

All of us employed persons are required to pay taxes every year. When we file for taxes, some might have noticed that the W-2 form lists different amounts of gross income than what we expected to earn throughout the year.  

This occurs because certain pretax deductions, such as retirement contributions, are excluded from gross pay when calculating taxable income. In addition, this pay may vary from employee to employee due to their contributions to the company. 

Employees' gross pay may vary from their taxable income, which is recorded in the W-2 form. However, taxable income plays a very crucial role. Taxable income is the portion of gross income subject to taxation after deductions and exemptions are applied.

The IRS allows certain deductions, such as voluntary 401(k) contributions or contributions to flexible spending accounts, which can reduce taxable income. This is why this pay is presented differently as a W-2. Social security taxes are separate from income taxes and are treated differently in tax forms.

Taxable income is reported on tax forms, such as the W-2, rather than on an income statement, a financial document businesses use to report financial performance.

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Base Pay
• Commission
• Earned Income
• Minimum Wage
• Salary Calculator