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# Gross Wages What are they and how do you calculate them?

August 22, 2024
Bill Kimball

Gross is an employee’s total earnings, such as wages or salary, while net pay is their earnings minus payroll deductions, including taxes, benefits and garnishments. Net pay, or take-home pay, is the amount of an employee’s paycheck after deductions are taken out of their gross pay. Gross pay is noted on a pay stub and should reflect an employee’s salary or hourly wage, plus reimbursements, bonuses, commissions and overtime pay. For example, if their pay is \$20 per hour and they worked 40 hours in a pay period, their gross pay should be \$800 for the pay period. If they’re paid a salary of \$60,000 and paid twice per month, their gross pay per pay period should be \$2,500 (\$60,000 divided into 24 pay periods).

When you add gross wages to your labor burden — employer-paid payroll taxes and benefits — you’re given a full picture of the cost of having employees. Calculating gross wages for one or two employees is usually straightforward. If you have many employees, however, calculating gross wages accurately can become more complicated. If you make a mistake, employees may be paid more or less than they should be, or their tax information may be incorrect. To simplify payroll calculations and reporting, consider using payroll software, which we dive into below.

## Which is more―net pay or gross pay?

Ensuring that both you and your employees understand what gross pay means and how it affects your employees helps you negotiate clear compensation where both parties are satisfied. Imagine that same individual pays \$1,500 per month in rent, \$450 in student loans, and \$300 towards an auto loan. All three of these expenses are excluded from the calculation of gross income for non-tax purposes. Peter’s wages before taxes and deductions are his hourly pay plus his tips collected. If a salaried employee gets paid semi-monthly, twice per month, 24 times per year — your employee’s total annual income gets divided by 24.

## Gross wages vs. wages included on Form W-2

The easiest way to calculate hourly wages is by the week since most overtime applies to working more than 40 hours in a given week. The calculations for each are slightly different, so we’ll walk through the steps of how to calculate salaried gross pay and hourly gross pay. Social Security is a federal retirement plan that helps provide retirement income to most workers in America. Employers and employees are both required to contribute to Social Security.

For example, many sales jobs like real estate include a commission for selling a property or meeting a certain sales quota. Commissions can be a motivating factor for employees to meet the company’s goals. When you calculate gross pay correctly, you’re making the first step in successfully managing your payroll. If you’re running payroll for a restaurant, your employees’ tips get added to the wages you pay them. The offer letter listed my start date and my hourly pay, also called a gross wage rate.

Gross pay is the total amount of wages an employer pays to an employee before any taxes or deductions. This is different from net pay, which is the final amount the employee receives after deductions. Understanding gross pay is essential for business budgeting and ensuring your payroll is legally compliant.

That’s because some of the money that’s taken out of your account is still subject to tax. If employees are owed commission, reimbursements or bonuses in a given pay period, add the amount owed to their wages to get their overall gross pay. We collaborate with business-to-business vendors, connecting them with potential buyers.

There’s also gross profit margin, which is more correctly defined as a percentage and is used as a profitability metric. The gross income for a company reveals how much money it has made on its products or services after subtracting the direct costs to make the product or provide the service. You may be asked to put down your employees’ gross wages for loan applications.

Adding the standard hourly wages and overtime pay together, they would receive \$950. Piece rate pay replaces hourly or salaried pay and is sometimes used by employers who want to motivate employees to reach a set quota. Some employees also like piece rate pay because they make a greater amount when they deliver higher output. Some employees like hourly wages because they can receive a greater overall sum if they work a large number of hours. However, the variability of hours worked means that paychecks can sometimes fluctuate.

Gross pay is the total amount of wages an employee earns before any deductions are made. Payroll deductions, taxes, and health benefits are deducted from an employee’s gross wages. Understanding gross pay is important for negotiating salary, managing your taxes, and planning a budget. In this article, we’ll go through the components of gross pay, common deductions from gross pay, and how to calculate gross pay for salaried and hourly wages so you can simplify your payroll process.

Hourly wages are one type of gross pay that an employer can pay an employee. You must calculate your employees’ gross wages every pay period, whether weekly, bi-weekly, or twice monthly. A base salary is the amount an employee earns prior to other forms of compensation. When the base salary and additional compensation are combined, the total is the employee’s gross wages.

1. That means it’s time to understand the numbers that go into an employee’s paycheck, including the difference between gross pay vs, net pay.
2. The calculations for each are slightly different, so we’ll walk through the steps of how to calculate salaried gross pay and hourly gross pay.
3. Gross income is the annual sum of an employee’s gross pay, such as their earnings for a year when you add up all their paychecks.
4. By using gross income and limiting what expenses are included in the analysis, a company can better analyze what is driving success or failure.

Retirement plans aren’t mandatory, but many employees choose to contribute to one. In many cases, employers will offer a retirement plan through the company and may also contribute to retirement contributions as an incentive to draw workers to the company. If an employee elects to pay into a plan like a 401(k), this will be deducted from gross wages. An hourly wage is a fixed amount earned per hour multiplied by the total number of hours worked in each pay period.

Gross pay is the total amount of an employee’s paycheck before taxes and deductions, while net pay is the amount an employee takes home after all deductions. Most credit and loan applications ask for your gross annual or monthly income. It’s important to put your gross income, rather than your net income, so that you can provide accurate information on your application and increase your chances of approval.

For example, \$70,000 annual salary or \$40 an hour wages are examples of gross pay. To find your personal monthly gross income, calculate the amount of money you earn each month. This will likely be different than the amount of money you take home or receive as payment directly from your employer. A company calculates gross income to understand how the product-specific aspect of its business performed. By using gross income and limiting what expenses are included in the analysis, a company can better analyze what is driving success or failure. An individual’s gross income is used by lenders or landlords to determine whether that person is a worthy borrower or renter.

The Social Security tax rate is 1.45% until the employee reaches the wage base limit, after which no further Social Security taxes are withheld for the remainder of the year. Gross wages are important because they provide the basis on which certain payroll calculations are made, including taxes and employee take-home pay. Failure to pay an employee all wages earned when due may lead to expensive wage claims, lawsuits or tax penalties.

Although you’ll see your gross pay on a paycheck, you’ll take home a smaller amount (called net pay) after taxes and other deductions. Understanding the difference between gross and net pay helps you plan an accurate budget. When employers discuss salaries and wages, they usually discuss them in terms of gross pay.

It’s also the value that’s commonly referred to when discussing compensation with new hires. Understanding the role that gross wages play in payroll processing is essential to paying employees correctly and complying with applicable employment laws. Special considerations go into calculating gross wages for hourly employees who work overtime hours. Hourly employees are generally nonexempt from the Fair Labor and Standards Act (FLSA), which governs overtime. This means you must pay them at least time-and-a-half for all hours over 40 they worked during a workweek.

But what exactly is — and isn’t — included in gross wages, and why is it so important to calculate gross wages correctly? We’ll explain exactly what gross wages are, how to calculate them, and why understanding gross wages is critical to managing your small business. For non-tax purposes, individuals can usually use their total wages as gross income. When applying for a loan, individual gross income will equal the amount of money the individual earns prior to any taxes being deducted or any expenses having been paid.