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Gross pay is an employee’s total salary or wages before deductions. It includes both base salary or wages and any bonuses earned during the pay period.
Gross pay is always higher than net pay, which is an employee’s take-home pay, or what they earn after deductions. Deductions from gross pay include state and federal taxes, social security and Medicare taxes, retirement plan contributions, and insurance plan payments.
It’s important for business leaders and HR to be aware of the distinction between these two and other compensation terms to make sure discussions about wages with your employees go smoothly. Gross pay is also a term used in accounting for things such as taxes and reporting, which means misunderstandings could be costly.
Calculating gross pay is slightly different for hourly and salaried employees. Below, we’ll walk you through each calculation separately.
How to calculate gross pay for hourly employees
To determine gross pay for an hourly employee, start with the number of hours the employee worked during a single week and their hourly wage. If the number of hours worked is 40 or less, you can simply multiply hours worked by hourly wage.
If the number of hours worked is greater than 40, you must account for overtime pay, which must be at least 1.5 times base pay for FLSA non-exempt employees. Some states may have higher overtime rate requirements.
Say an hourly employee worked 50 hours in one week and has a base pay of $20 per hour. In that case, you would calculate pay for the week as follows.
40 hours x $20/hour = $800
10 hours x $30/hour (overtime pay) = $300
Total pay = $1,100 ($800 + $300
If your company issues paychecks on a biweekly basis, you’ll need to calculate pay for both weeks and then add them together to determine an employee’s gross pay for that pay period. Don’t forget to add in any bonuses or holiday pay the employee may have earned during that pay period.
How to calculate gross pay for salaried employees
Salaried employees receive a fixed amount of money each year, so their gross pay typically doesn’t depend on how many hours they work. For most salaried employees, their gross pay should only change from one pay period to another if they receive a bonus or raise.
Salaried employees who make less than $35,568 per year ($684 per week) are FLSA non-exempt and must also receive overtime pay if they work more than 40 hours per week. You can calculate gross pay for these employees using the method described below, but you must remember to add overtime pay.
To calculate a salaried employee’s gross pay for any pay period, you must know their annual salary and your company’s pay periods. For biweekly pay periods, divide the employee’s annual salary by 26. For twice-monthly pay periods, divide by 24. For monthly pay periods, divide by 12.
Again, don’t forget to add any bonuses the employee may have earned during the pay period.
Gross pay vs. net pay: What is taken out?
The amount that employees take home each pay period is always less than their gross pay. This is due to taxes and other expenses that employers are required to deduct on behalf of their employees.
There are four primary types of deductions responsible for the difference between gross pay and net pay.
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State and federal tax withholdings
Employers are required to withhold money for state and federal taxes from employees’ paychecks. How much is withheld for federal taxes depends on an employee’s gross pay, their filing status (single or married), how much they’ve elected to withhold on their W-4 form, and the IRS’s current withholding rate schedule.
State taxes vary from state to state. In states that do not have income taxes (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming), there are no state tax withholdings on employees’ paychecks.
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Social security and Medicare taxes
Employees are responsible for paying one-half of social security and Medicare taxes under the Federal Insurance Contributions Act (FICA). Employers pay the other half.
An employee’s half of social security taxes is equal to 6.2% of their first $147,000 in gross pay (wages above this amount are not subject to social security taxes). An employee’s half of Medicare taxes is equal to 1.45% of their gross pay, with no limit on the amount of wages that can be taxed.
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Retirement plan contributions
If your company provides a retirement plan for employees, such as a 401(k) plan, then employees may opt to make contributions to that plan out of their gross pay. These contributions are optional for employees, although many employers choose to offer retirement contribution matches that incentivize employees to contribute.
Employees can contribute up to $20,500 to a 401(k) in 2022. Employees over 50 can also make catch-up contributions of up to $6,500.
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Insurance plan payments
If your company offers health, dental, vision, life, or other insurance plans for employees, employees may pay their portion of plan premiums from their gross pay. Employees can also choose to contribute to a health savings account from their gross pay, up to a maximum of $3,650 for employee-only coverage or $7,300 for family coverage.
Employees are not required to opt in to employers’ insurance plans. Employees that do not participate in any employer-sponsored plan will not have plan payments deducted from their gross pay.
Why does gross pay matter?
Gross pay matters for employers for several reasons. First, when you’re determining an employee’s salary or making an offer to a new hire, the salary or wage offered is typically gross pay. It’s important for you to ensure employees understand this when they’re taking a job offer or a raise. In addition, when your team is running payroll, gross pay is the basis used to calculate employees’ federal, state, social security, and Medicare taxes.
If you’re an employee, gross pay is the starting point for determining what you owe in federal and state taxes at the end of each year. Gross pay is also the number that most lenders consider when evaluating your finances for a mortgage or other financial product.
Conclusion
Gross pay is an employee’s total salary or wages, including bonuses and before taxes, retirement contributions, or insurance plan payments are deducted. It is always higher than net pay, which is an employee’s take-home pay after these deductions are taken out of their paycheck. Whether you’re an HR professional, in management, or an employee, understanding this term can avoid confusion and mistakes about wages.
