What Are Gross Wages?
Gross pay for an employee is the amount used to calculate that employees' wages (for an hourly employee) or salary (for a salaried employee. It is the total amount you as the employer owes the employee for work during one pay period. Gross pay includes regular hourly or salaried pay and it also includes any overtime paid to the worker during the pay period.
For both salaried and hourly employees, the calculation is predicated on an agreed-upon amount of gross pay. That is, both the worker and employer have agreed that this is often the rate of pay .The rate of pay should be in writing and signed by both the worker an employer.
For hourly employees, that rate of pay could be negotiated by a union contract. For salaried employees, that rate could be in an employment agreement or simply a pay letter. In each case, the gross rate of pay should be agreed to and signed before the worker begins working.
Employers can calculate gross wages on a quarterly, monthly, weekly, or daily basis—or for any other period of your time they desire. Understanding your employee’s gross pay is vital because gross wages are necessary for calculating the quantity of taxes and deductions that has got to be withheld—especially if deductions are supported a percentage of the employee's gross wages.
How to Calculate Gross Pay — in General
Hourly Gross Pay is calculated by multiplying the number of hours worked in the pay period times the hourly pay rate. Overtime pay is also included in the gross pay calculation.
Gross pay for salaried employees is calculated by dividing the total annual pay for that employee by the number of pay periods in a year. For example, if a salaried employee's annual pay is $30,000, and he or she is paid twice a month, the gross pay for each of the 24 pay periods is $1250.
Gross Pay vs. W-2 Pay
Gross pay for an employee may be different from wages shown on an employee's W-2 form. The W-2 shows total taxable wages, and some wages may need to be deducted before gross pay is determined or the W-2 wage amount is calculated. Some pretax deductions from employee pay aren't considered taxable income (for federal income taxes). Some examples of deductions that affect taxable wages:
- Contributions to employer-sponsored retirement plans (like a 401(k))
- Contributions to a flexible spending account
- Medical premiums
- Dependent care
Gross Pay vs. FICA Wages
Just to make things more complicated, the amount of Social Security wages for FICA tax (Social Security/Medicare) on the employee's W-2 may be different from the total gross pay and wages for tax purposes. Deductions that affect FICA wages include:
- Wages paid to a worker through employer-sponsored disability insurance
- Reimbursements for employee travel expenses, if within the amounts for per diems or the standard mileage
- Family employees under 18 (age 21 for domestic work
- Some excess fringe benefits
- Employee insurance
Details on How to Calculate Gross Pay for Salaried Employees
Start with the employee's annual salary and divide by the number of pay periods in a year. That amount is the employee's gross pay for the pay period. Here is an example, if an employee makes $24,000 a year, and your company pays twice a month, that's 24 pay periods in a year, so the gross pay for each pay period is $1,000.
Add any other payments that the employee received, such as reimbursements. Bonuses may be added to the paycheck but they are more commonly paid in a separate check. Subtract any unpaid time off (unusual for a salaried employee). Add overtime pay if the employee's pay is over the minimum.
An example of gross pay calculation for a salaried employee:
A salaried employee who is not eligible for overtime pay has an annual salary of $47,000 a year. The salaried employees at this company are paid on the 15th and 30th of each month (twice a month). The $47,000 is divided by 24 to get $1958.33, which is the gross pay for each pay period.
Details on How to Calculate Gross Pay for Hourly Employees
- Take the information on the employee's hours worked from the timesheet or another way you record employee time.
- Calculate regular pay by multiplying the total hours worked in the pay period (not including overtime hours) times the employee's hourly pay rate.
- Check to see if the employee has worked any overtime hours. You must include any overtime pay in the gross pay amount.
Other pay and benefits an employee receives, like tips and car expense reimbursements, may be taxable to the employee. These are entered in different places on the employee's annual W-2 form and they are not included in gross pay.
Details on Paying Overtime in Gross Pay
Federal labor law regulates the minimum overtime you must pay an employee. The calculation of overtime is 1 and 1/2 times the employee's hourly rate for any hours worked over 40 in a week. You can pay overtime at a higher rate, but not any lower rate. If your state has overtime regulations that higher than the federal requirements, you must use the state law. Findlaw has a list of state overtime laws.
In addition to paying hourly employees for overtime, you may also need to pay some salaried employees. Salaried employees are usually exempt from overtime, but federal law requires that you pay overtime to lower-paid salaried employees. In general, employees whose salary is equal to or less than $455 a week ($23,660 annually) must receive overtime, even if they are classified as exempt.
If you think you might have salaried employees in this situation, you can get more details on when this overtime rule must be followed.
An example of how to calculate hourly gross pay: Let's say an employee is paid $5 an hour and worked 43 hours in a work week and you pay overtime at 1 1/2 times for all hours over 40.
- First, calculate regular pay: $5 x 40 hours = $200
- Then, calculate overtime pay $5 x 1.5 x 3 hours = $22.50
- The total gross pay for the weekly pay period is $222.50
How Gross Pay Is Used for Payroll and Payroll Taxes
As noted above, gross pay is the starting point for other calculations. In every case, the individual calculation begins with gross pay. That is, the calculations are independent of each other.
- Calculating overtime pay for hourly employees (and some salaried employees)
- Calculating and withholding federal and state income taxes
- Calculating and withholding FICA taxes (Social Security and Medicare)
- Calculating other deductions and benefits.
It is also important to figure out the taxable year for paycheck issued at the beginning of the year for work done at the end of the year. This is important because it affects the taxable income for employees, as shown in employee gross pay on the W-2 forms for each year.
Gross Pay vs. Taxable Wages
The amount on an employee's W-2 form (annual wage and tax report) is different from gross pay. The amount on Line 1 of the W-2 is "wages, tips, other compensation," and it includes all compensation including tips and taxable employee benefits.
What Is the Difference Between Net and Gross Salary?
The wage an employee is paid before taxes and deductions is their gross salary. Net salary is the pay an employee receives in their paycheck after taxes and deductions—or the pay they actually take home in their paychecks. To calculate the net pay of an employee, you must first calculate gross pay then subtract any deductions from gross pay to get the net wages of the employee (gross pay-deductions=net pay).
What Is Included in Gross Wages?
Gross wages include all of an employee’s pay before taxes and other mandatory and discretionary deductions have been taken out. Gross wages include tips, salaries, hourly wages, overtime, vacation pay, piece rate pay, commissions, bonuses, sick pay, and holiday pay. The majority of an employee's gross wages typically consists of their base pay like their salary, hourly pay, or tips (for tip-based workers).
Why Is It Important to Understand Gross Wages?
Employee deductions and taxes are generally calculated on employee’s gross wages. For employers, knowing the way to correctly calculate gross wages is vital for calculating mandatory deductions—such as what proportion in taxes, Social Security , and Medicare you would like to withhold from an employee's paycheck.If employees have an interest in viewing their gross buy the year, they will find their gross wage also as any deductions on their pay stub. Gross wages are usually the most important recorded number near the highest of the pay stub.