Eddy’s HR Mavericks Encyclopedia
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Gross Pay
In the world of payroll, you have to calculate tax deductions, benefits contributions, taxable income and net pay every single pay period. Although deductions might be unique for each employee, every calculation is based on gross pay.
Your understanding of gross pay is essential not only for accurate paychecks, but also to be able to explain those numbers clearly to employees. So, what is gross pay?
Your understanding of gross pay is essential not only for accurate paychecks, but also to be able to explain those numbers clearly to employees. So, what is gross pay?
What Is Gross Pay?
Gross pay is the total salary or hourly wages earned by an employee before deductions. This includes the base salary and additional income such as bonuses. Employees may be disappointed or confused when they learn that their gross pay is not what they will actually take home after deductions are made. Because of this common confusion, it’s always good practice to explain the difference between gross pay and net pay to new employees and show them how deductions will impact their paycheck.
Gross Pay vs Net Pay: What’s the Difference?
Gross pay is the total compensation offered by the employer, whereas net pay is the amount of money that employees actually receive in their paychecks or via direct deposit after deductions are made. Some deductions are legally required, while others are voluntary.
How to Calculate Gross Pay
Gross pay calculations for salaried employees are slightly different from calculations for hourly employees. Below are some basic steps to help you calculate each.
Calculating Gross Pay for Hourly Employees
Let's begin by looking at how to calculate gross pay for hourly workers.
Step 1: Multiply Wage by Hours Worked Per Week
First, multiply the employee’s wage by the number of hours they worked during that week. We start with weekly pay for hourly employees because of the possibility of overtime. So, if the employee worked more than 40 hours, be sure to calculate overtime pay separately and then add the two amounts together. Example 1: Assume an employee whose hourly wage is $15 per hour works 45 hours in their first week of the pay period. The overtime rate is “time-and-a-half,” or 1.5 x $15.
- $15 x 40 hours = $600
- ($15 (1.5)) x 5 overtime hours = $112.50
- Gross Pay: $712.50
Step 2: Calculate Total Hours Worked per Pay Period
Calculate weekly wages for every week included in the pay period. For example, if your company pays employees bi-weekly, then you’ll have to add wages from each of the two weeks included in the pay period. Example 2: Assume the employee from Example 1 then worked 35 hours during the second week of the bi-weekly pay period:
- Week 1: $712.50 ($600 + $112.50 of overtime pay)
- Week 2: $525 ($15 x 35 hours)
- Total Gross Pay: $1,237.50
Step 3: Add Bonuses and Other Additional Income Earned During the Pay Period
If your company pays employees bonuses, commissions, or other forms of additional payment, these should be included as well. So, add in any additional pay earned during the pay period.
Calculating Gross Pay for Salaried Employees
Next, let's go over how to calculate gross pay for salaried workers.
Step 1: Calculate the Employee’s Salary
The employee’s salary is their total annual pay. Because many salaried employees are considered FLSA exempt, they do not earn additional pay for additional hours worked or for overtime. If this is the case, then the annual gross salary should be a set amount that only changes if the employee receives a raise.
Step 2: Divide the Total Salary by the Number of Pay Periods Each Year
There are a variety of different pay period options. While most companies pay salaried employees on a bi-weekly basis, some companies pay them on a monthly basis or twice a month.
- If your pay periods are bi-weekly, then divide the total annual pay by 26.
- If pay periods are monthly, then divide the total annual pay by 12.
- If the company pays employees twice a month, then divide the total annual pay by 24.
Let’s look at an example. Pretend you have a worker who makes $50,000/year. Let’s also say your company pays employees twice a month, and therefore, you have 24 pay periods. The gross wage can be found by taking the salary ($50,000) and dividing it by the number of pay periods (24). $50,000 / 24 = $2,083.33. This employee’s gross wages for each pay period is $2,083.33 (before adding bonuses and other additional income).
Step 3: Add Bonuses and Other Additional Income Earned During the Pay Period
Lastly, incorporate bonuses and other additional pay, such as commissions or other forms of incentive pay. This calculation of gross pay is the first step towards writing a paycheck. For more detail on the next steps, see our article on net pay.
What About Reimbursements?
Whether reimbursements are a part of gross income depends on whether the reimbursements are a part of an accountable plan, (an IRS definition). If they are a part of an accountable plan, then they are not taxable and should not be listed as income. To be part of an accountable plan, the expenditures reimbursed must be:
- Connected to the business and
- Adequately accounted for by the employee within a reasonable period of time.
If the company gave the employee a predetermined amount to use for expenses (usually called an advance), the excess money must be returned to the company within a reasonable period of time for the reimbursement to remain a part of an accountable plan. Want to know more about reimbursements and other fringe benefits? Check out IRS Publication 5137: Fringe Benefit Guide.
What Is Taken Out of Gross Pay?
Although some deductions are legally required, some are optional and can be adjusted by the employee. The following list includes both required and optional deductions.
Required: State and Federal Taxes
State and federal tax deductions are used to pay taxes to the state where the wages were earned and to the IRS on behalf of the employee. How much money is deducted for federal taxes will depend on your employee’s gross wages, their filing status (single or married), withholding allowances the employee elected on their W-4, and the IRS withholding rate schedules. State taxes vary by state. To learn more about your state’s income tax, visit your state’s department of revenue website.
Required: Social Security and Medicare Deductions (FICA taxes)
Required Federal Insurance Contributions Act (FICA) tax deductions contribute to Social Security and Medicare on behalf of your employee.
Optional: Retirement Plan Contributions
Many companies provide retirement benefits to their employees. The most common retirement plan is a 401(k) plan. A 401(k) plan allows employees to make contributions to a tax-advantaged retirement account through deductions from their gross pay. As the employer, you can match some or all of these contributions. Although these plans are not required, if your company chooses to provide them, then the plan must meet certain requirements.
Optional: Health, Dental & Vision Insurance
Deductions for medical, dental, or vision insurance are made to help pay for medical insurance provided by the company. Not all employees enroll in their employer’s health care plans, however. The most common reason for this is because they’ve elected to enroll in another family member’s insurance as a dependent. A company may offer other health-related benefits that require deductions from gross pay, such as life insurance or a health savings account (HSA).
Other
Other possible deductions include deductions for child support and wage garnishments.
Topics
Natasha Wiebusch
Natasha is a writer and former labor and employment attorney turned HR professional. Her experience as a litigator and HR trainer inspired her to begin writing about anti-discrimination laws in the workplace. As a writer at Eddy HR, she hopes to provide helpful information to both employees and HR professionals who need help navigating the vast world of human resources. When she's not writing, you might find her cheering on the Green Bay Packers or hiking in the Northwoods of Wisconsin.
Frequently asked questions
Other Related Terms
Eddy’s HR Mavericks Encyclopedia
Gross Pay
In the world of payroll, you have to calculate tax deductions, benefits contributions, taxable income and net pay every single pay period. Although deductions might be unique for each employee, every calculation is based on gross pay.
Your understanding of gross pay is essential not only for accurate paychecks, but also to be able to explain those numbers clearly to employees. So, what is gross pay?
Your understanding of gross pay is essential not only for accurate paychecks, but also to be able to explain those numbers clearly to employees. So, what is gross pay?
What Is Gross Pay?
Gross pay is the total salary or hourly wages earned by an employee before deductions. This includes the base salary and additional income such as bonuses. Employees may be disappointed or confused when they learn that their gross pay is not what they will actually take home after deductions are made. Because of this common confusion, it’s always good practice to explain the difference between gross pay and net pay to new employees and show them how deductions will impact their paycheck.
Gross Pay vs Net Pay: What’s the Difference?
Gross pay is the total compensation offered by the employer, whereas net pay is the amount of money that employees actually receive in their paychecks or via direct deposit after deductions are made. Some deductions are legally required, while others are voluntary.
How to Calculate Gross Pay
Gross pay calculations for salaried employees are slightly different from calculations for hourly employees. Below are some basic steps to help you calculate each.
Calculating Gross Pay for Hourly Employees
Let's begin by looking at how to calculate gross pay for hourly workers.
Step 1: Multiply Wage by Hours Worked Per Week
First, multiply the employee’s wage by the number of hours they worked during that week. We start with weekly pay for hourly employees because of the possibility of overtime. So, if the employee worked more than 40 hours, be sure to calculate overtime pay separately and then add the two amounts together. Example 1: Assume an employee whose hourly wage is $15 per hour works 45 hours in their first week of the pay period. The overtime rate is “time-and-a-half,” or 1.5 x $15.
- $15 x 40 hours = $600
- ($15 (1.5)) x 5 overtime hours = $112.50
- Gross Pay: $712.50
Step 2: Calculate Total Hours Worked per Pay Period
Calculate weekly wages for every week included in the pay period. For example, if your company pays employees bi-weekly, then you’ll have to add wages from each of the two weeks included in the pay period. Example 2: Assume the employee from Example 1 then worked 35 hours during the second week of the bi-weekly pay period:
- Week 1: $712.50 ($600 + $112.50 of overtime pay)
- Week 2: $525 ($15 x 35 hours)
- Total Gross Pay: $1,237.50
Step 3: Add Bonuses and Other Additional Income Earned During the Pay Period
If your company pays employees bonuses, commissions, or other forms of additional payment, these should be included as well. So, add in any additional pay earned during the pay period.
Calculating Gross Pay for Salaried Employees
Next, let's go over how to calculate gross pay for salaried workers.
Step 1: Calculate the Employee’s Salary
The employee’s salary is their total annual pay. Because many salaried employees are considered FLSA exempt, they do not earn additional pay for additional hours worked or for overtime. If this is the case, then the annual gross salary should be a set amount that only changes if the employee receives a raise.
Step 2: Divide the Total Salary by the Number of Pay Periods Each Year
There are a variety of different pay period options. While most companies pay salaried employees on a bi-weekly basis, some companies pay them on a monthly basis or twice a month.
- If your pay periods are bi-weekly, then divide the total annual pay by 26.
- If pay periods are monthly, then divide the total annual pay by 12.
- If the company pays employees twice a month, then divide the total annual pay by 24.
Let’s look at an example. Pretend you have a worker who makes $50,000/year. Let’s also say your company pays employees twice a month, and therefore, you have 24 pay periods. The gross wage can be found by taking the salary ($50,000) and dividing it by the number of pay periods (24). $50,000 / 24 = $2,083.33. This employee’s gross wages for each pay period is $2,083.33 (before adding bonuses and other additional income).
Step 3: Add Bonuses and Other Additional Income Earned During the Pay Period
Lastly, incorporate bonuses and other additional pay, such as commissions or other forms of incentive pay. This calculation of gross pay is the first step towards writing a paycheck. For more detail on the next steps, see our article on net pay.
What About Reimbursements?
Whether reimbursements are a part of gross income depends on whether the reimbursements are a part of an accountable plan, (an IRS definition). If they are a part of an accountable plan, then they are not taxable and should not be listed as income. To be part of an accountable plan, the expenditures reimbursed must be:
- Connected to the business and
- Adequately accounted for by the employee within a reasonable period of time.
If the company gave the employee a predetermined amount to use for expenses (usually called an advance), the excess money must be returned to the company within a reasonable period of time for the reimbursement to remain a part of an accountable plan. Want to know more about reimbursements and other fringe benefits? Check out IRS Publication 5137: Fringe Benefit Guide.
What Is Taken Out of Gross Pay?
Although some deductions are legally required, some are optional and can be adjusted by the employee. The following list includes both required and optional deductions.
Required: State and Federal Taxes
State and federal tax deductions are used to pay taxes to the state where the wages were earned and to the IRS on behalf of the employee. How much money is deducted for federal taxes will depend on your employee’s gross wages, their filing status (single or married), withholding allowances the employee elected on their W-4, and the IRS withholding rate schedules. State taxes vary by state. To learn more about your state’s income tax, visit your state’s department of revenue website.
Required: Social Security and Medicare Deductions (FICA taxes)
Required Federal Insurance Contributions Act (FICA) tax deductions contribute to Social Security and Medicare on behalf of your employee.
Optional: Retirement Plan Contributions
Many companies provide retirement benefits to their employees. The most common retirement plan is a 401(k) plan. A 401(k) plan allows employees to make contributions to a tax-advantaged retirement account through deductions from their gross pay. As the employer, you can match some or all of these contributions. Although these plans are not required, if your company chooses to provide them, then the plan must meet certain requirements.
Optional: Health, Dental & Vision Insurance
Deductions for medical, dental, or vision insurance are made to help pay for medical insurance provided by the company. Not all employees enroll in their employer’s health care plans, however. The most common reason for this is because they’ve elected to enroll in another family member’s insurance as a dependent. A company may offer other health-related benefits that require deductions from gross pay, such as life insurance or a health savings account (HSA).
Other
Other possible deductions include deductions for child support and wage garnishments.
Topics
Natasha Wiebusch
Natasha is a writer and former labor and employment attorney turned HR professional. Her experience as a litigator and HR trainer inspired her to begin writing about anti-discrimination laws in the workplace. As a writer at Eddy HR, she hopes to provide helpful information to both employees and HR professionals who need help navigating the vast world of human resources. When she's not writing, you might find her cheering on the Green Bay Packers or hiking in the Northwoods of Wisconsin.
Frequently asked questions
Other Related Terms
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