What is Gross Pay? How to Calculate Gross Pay
When you receive a paycheck from an employer, you've probably looked closely at your pay stub to ensure that the amount of money, hours, and benefits are accurate. You've probably noticed a section for gross pay.
Gross pay is important, and by knowing how to spot and calculate this amount, employees gain insight into their full annual salary.
In this post, we'll dive into the definition, terms, and examples so that you can understand how to calculate gross pay.
Here’s What We’ll Cover:
What is Gross Pay?
Gross pay is the amount of money earned per paycheck before deductions are made. Typically, the gross pay amount includes an employee's standard pay rate or salary, plus any overtime during a pay period.
Whether an employer pays weekly, bi-weekly, or monthly, the definition of gross pay remains the same. The amount of compensation that an employee receives on each check may change.
How is Gross Pay Different Than Net Pay?
We've answered the question of "What is gross pay?" Now, we can distinguish between this amount and net pay.
Gross pay is the full amount that an employee earns each pay cycle based on the contracted rate; it is not the amount that an individual receives as a deposit
After payroll deductions, the amount of money that an employee receives is called net pay. Net pay is "take-home" pay, because it is the amount of money available in a bank account once the payroll check clears.
Who Should Care About Gross Pay?
Employees should care about gross wages because this amount is what an employer has agreed to distribute throughout the year, divided up into set pay periods.
For instance, if your employer pays monthly and you have an annual compensation of $120,000, you can expect that each month's gross pay is $10,000. By understanding your gross pay, you have better bargaining power when it comes to negotiating your salary.
Salaried vs. Hourly
Salaried and hourly employees receive their earnings differently. Salaried employees are compensated for completed work over a given range of time, whereas hourly employees are compensated by multiplying the hours worked by the hourly rate.
How to Calculate Gross Pay
The gross pay calculation is often performed automatically by an employer's payroll system. To check manually, use the following calculations.
Calculating the gross pay for salaried employees is simple. The standard gross pay calculation is:
Gross Pay = Annual Salary Amount / Number of Pay Periods
To earn a gross pay of $10,000/month, an employee makes $120,000 annually and receives 12 paychecks. Gross pay per check decreases with additional pay periods.
A typical calculation for hourly employees is as follows.
Gross Pay = Hours Worked in a Pay Period * Hourly Rate (+ Overtime Hours * Hourly Overtime Rate)
To earn a gross pay of $5,000, an employee would need to work 80 hours in a pay period, with an hourly rate of $62.50/hour.
Gross pay is the amount that each employee could receive prior to deductions. Deductions are split between the employer and the employee.
While the employer takes care of certain income, business, and FICA taxes, the employee may be responsible for other types of contributions.
Taxes and Fees
Payroll Taxes – Payroll tax encompasses four of the most common taxes, including federal income tax, Social Security, Medicare, and unemployment.
Social Security –You are required to pay into the Social Security System. 6.2% of Social Security tax is paid by an employer, and 6.2% is paid by the employee.
Medicare – Each employed individual pays into Medicare. The amount is currently at 1.45% of an employee's pay.
Retirement and Insurance Contributions
Employees can contribute to things like retirement and insurance. While these costs deduct from gross pay, they are usually valuable.
Health Insurance – Many employers contribute a set amount per paycheck to health insurance, but employees also pay into premiums.
Life Insurance – This coverage usually ends or expires when an employee changes jobs.
Retirement Investments – Contributions to retirement plans like 401(k) accounts are made as deductions. Employers may match these retirement contributions.
Understanding Gross Pay at Tax Time
When you get ready to file taxes, you might notice that your W-2 Form lists a different total amount than your expected gross pay. This is because Line 1 on a W-2 Form lists all gross wages, tips, and compensation earned throughout the year.
Many pre-tax contributions aren't taxable, so you'll see slight variations in your gross pay and W-2 wages.
More Accounting Resources for Businesses
- How to Find Gross Profit: Definition and Calculation
- Everything Small Business Owners Need to Know About Payroll