Gross pay
Summary definition: The total sum of money an employee earns before taxes and withholdings are applied.
What is gross pay?
Gross pay is the total amount of money an employee earns before taxes and withholdings are taken out. It’s normally the baseline for calculating an employee’s overall compensation and benefits, both when first hiring them and when awarding any pay increases.
An employee’s total gross pay consists of several different components, including their wages, salary, overtime pay, bonuses, or commissions. It can be influenced by multiple factors, including the employee’s title, level of experience or education, and cost of living for the area in which she or he lives. Calculating an individual’s gross pay also varies based on the nature of her or his employment (i.e., salaried, hourly, temporary, etc.).
Gross pay is also used to calculate an employee’s taxable income, as the amount owed in payroll taxes is often a percentage of the total gross pay the employee earns.
Key takeaways
- Gross pay is the total money earned before taxes are paid and deductions are withheld.
- It can consist of several types of pay (salary, bonuses, commissions, overtime pay, etc.).
- Unlike gross pay, net pay is the amount employees take home after all deductions, such as taxes, insurance, and retirement contributions, are subtracted.
Gross pay vs. net pay
Gross pay is the total amount an employee earns before any deductions are withheld. Net pay, conversely, is what’s left after deductions are subtracted, which can include:
- Federal and state income taxes
- Federal Medicare and Social Security taxes
- Retirement savings
- Health insurance premiums
- Flexible benefits deposits (e.g., health savings account (HSA) or flexible spending account (FSA))
For example, if Employee A above earned $4,166.66 in gross wages, but has $2,000 deducted for taxes and withholdings, she or he will only receive a net pay of $2,166.66.
The gap between gross pay and net pay is where payroll calculations matter most, since deductions can significantly change what an employee actually takes home.
As there are so many different deductions of varying amounts that can occur, employees should recognize the difference between them when managing a personal budget. Some of these deductions, for instance, can be adjusted to accommodate one’s financial situation (e.g., retirement contributions), while others cannot (e.g., income taxes).
How to calculate gross pay
Determining gross pay for different pay types, including salaried employees, hourly workers, and those who earn sales commissions, can require different calculations.
Annual salary
Typically, salaried employees earn gross income in equal amounts each pay period. For example, if Employee A earns $50,000 a year and is paid bi-monthly, her or his gross pay would be $2,083.33 each pay period ($50,000 ÷ 24 pay periods).
If she or he were paid once per month, the gross pay each pay period would be $4,166.66 instead ($50,000 ÷ 12 pay periods).
Net pay can fluctuate from one pay period to the next due to several factors, such as changes to gross pay, tax rates, etc. However, the core logic highlighted above remains the same.
| Annual salary | Pay frequency | Gross pay per period |
|---|---|---|
| $50,000 | Semi-Monthly | $2,083.33 |
| $50,000 | Monthly | $4,166.66 |
Hourly wages
Hourly employees often earn gross pay at a specified rate for each hour of work they complete. The more hours they work, the greater their gross pay is for that pay period.
For example, if Employee B earns $15.00 per hour and works 40 hours a week, she or he would earn a gross pay of $600 ($15 × 40 hours) that week.
However, if she or he also worked 10 hours of overtime at a rate of $20 per hour, there’d be an extra $200 in overtime pay ($20 × 10 hours) for a total gross pay of $800 that week ($600 normal wages + $200 overtime wages).
| Hourly wage | Hours worked | Overtime rate | Gross pay per period |
|---|---|---|---|
| $15.00 | 40 (regular) 10 (overtime) |
$20.00 | $800 ($15x40) + ($20x10) |
Sales commissions
For employees like salespeople who work solely on commission, the total gross pay workers earn is dependent on the amount of sales they generate and the commission percentage agreed upon with their employer.
For example, if Salesperson C made $4,000 in sales during the prior two weeks and her or his sales commission is 25%, then her or his gross pay for those two weeks would be $1,000 ($4,000 × 0.25 commission).
However, if she or he only made $1,000 in sales during the next two weeks, the gross pay for that period would instead be $250 ($1,000 × 0.25 commission).
| Sales amount | Commission % | Gross pay per period |
|---|---|---|
| $4,000 | 25% | $1,000 |
| $1,000 | 25% | $250 |
The importance of understanding gross pay
Understanding and reporting gross pay is important for both employers and their employees in different ways and circumstances. Here are some examples:
| Employers | Employees |
|---|---|
| Legal compliance: Accurately determining and documenting gross pay ensures compliance with employment laws, including minimum wage requirements and overtime compensation regulations. | Income evaluation: Gross pay empowers employees to assess their total compensation and understand the monetary value of their services. |
| Payroll management: Gross pay serves as a vital component in calculating taxes, benefits, and other deductions from employees' wages, enabling precise payroll management. | Budgeting and financial planning: By knowing their gross pay, employees can effectively budget, plan expenses, and make informed financial decisions. |
| Transparent compensation: Communicating the gross pay to employees promotes transparency, enhancing trust and fostering a positive work environment. | Loan and credit applications: Lenders often consider gross pay when evaluating loan or credit applications, making it essential for employees seeking financial assistance. |
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