Summary Definition: The total sum of money an employee earns before taxes and withholdings are applied.
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 is comprised of several different components, including her or his 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.
Understanding and reporting gross pay is important for both employers and their employees in different ways and circumstances. Here are some examples:
|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.|
Typically, salaried employees earn gross pay 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.
|Employee Type||Annual Salary||Pay Frequency||Gross Pay Per Period|
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).
|Employee Type||Hourly Wage||Regular Hours||Overtime Hours||Overtime Rate||Gross Pay Per Period|
|Hourly||$15.00||40||10||$20.00||$800 ($15x40) + ($20x10)|
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).
|Employee Type||Sales Amount||Commission %||Gross Pay Per Period|
Simply put, gross pay is the total amount of money an employee earns, while net pay is the remaining amount after all taxes and withholdings have been made. These deductions can include:
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.
Since there are so many different deductions of varying amounts that can occur, employees must recognize the difference between gross and net pay when managing a personal budget. Some of these deductions can be adjusted to accommodate one’s financial situation (like retirement contributions), while others cannot (like taxes).
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