What Is Gross Pay and How Is It Calculated?
Calculating Gross Pay for Salaried and Hourly Employees
In the payroll world, everything begins with gross pay. That is, all other calculations for employee pay, overtime, withholding, and deductions are based on gross pay. Because this is an important concept, this article will give you all the details about calculating gross pay and using it in other calculations.
What Is Gross Pay?
Gross pay for an employee is the amount used to calculate that employees' wages (for an hourly employee) or salary (for a salaried employee. It is the total amount you as the employer owe the employee for work during one pay period. Gross pay includes regular hourly or salaried pay and it also includes any overtime paid to the employee during the pay period.
For both salaried and hourly employees, the calculation is based on an agreed-upon amount of gross pay. That is, both the employee and employer have agreed that this is the pay rate.The pay rate should be in writing and signed by both the employee an employer.
For hourly employees, that pay rate might be negotiated by a union contract. For salaried employees, that rate might be in an employment contract or just a pay letter. In each case, the gross pay rate should be agreed to and signed before the employee begins working.
How to Calculate Gross Pay — in General
In general, here is how gross pay is calculated:
Hourly Gross Pay is calculated by multiplying the number of hours worked in the pay period times the hourly pay rate. Overtime pay is also included in the gross pay calculation. (You will find more about how to calculate overtime below.
Gross pay for salaried employees is calculated by dividing the total annual pay for that employee by the number of pay periods in a year. For example, if a salaried employee's annual pay is $30,000, and he or she is paid twice a month, the gross pay for each of the 24 pay periods is $1250.
Gross Pay vs. W-2 Pay
Gross pay for an employee may be different from wages shown on an employee's W-2 form. The W-2 shows total taxable wages, and some wages may need to be deducted before gross pay is determined or the W-2 wage amount is calculated. Some pretax deductions from employee pay aren't considered taxable income (for federal income taxes). Some examples of deductions that affect taxable wages:
- Contributions to employer-sponsored retirement plans (like a 401(k))
- Contributions to a flexible spending account
- Medical premiums
- Dependent care.
Gross Pay vs. FICA Wages
Just to make things more complicated, the amount of Social Security wages for FICA tax (Social Security/Medicare) on the employee's W-2 may be different from the total gross pay and wages for tax purposes. Deductions that affect FICA wages include:
Details on How to Calculate Gross Pay for Salaried Employees
- Start with the employee's annual salary and divide by the number of pay periods in a year. That amount is the employee's gross pay for the pay period. Here is an example, if an employee makes $24,000 a year, and your company pays twice a month, that's 24 pay periods in a year, so the gross pay for each pay period is $1,000.
- Add any other payments that the employee received, such as reimbursements. Bonuses may be added to the paycheck but they are more commonly paid in a separate check.
- Subtract any unpaid time off (unusual for a salaried employee).
- Add overtime pay if the employee's pay is over the minimum.
An example of gross pay calculation for a salaried employee: A salaried employee who is not eligible for overtime pay has an annual salary of $47,000 a year. The salaried employees at this company are paid on the 15th and 30th of each month (twice a month). The $47,000 is divided by 24 to get $1958.33, which is the gross pay for each pay period.
Details on How to Calculate Gross Pay for Hourly Employees
- Take the information on the employee's hours worked from the timesheet or another way you record employee time.
- Calculate regular pay by multiplying the total hours worked in the pay period (not including overtime hours) times the employee's hourly pay rate.
- Check to see if the employee has worked any overtime hours. You must include any overtime pay in the gross pay amount.
Other pay and benefits an employee receives, like tips and car expense reimbursements, may be taxable to the employee. These are entered in different places on the employee's annual W-2 form and they are not included in gross pay.
Details on Paying Overtime in Gross Pay
Federal labor law regulates the minimum overtime you must pay an employee. The calculation of overtime is 1 and 1/2 times the employee's hourly rate for any hours worked over 40 in a week. You can pay overtime at a higher rate, but not any lower rate. If your state has overtime regulations that higher than the federal requirements, you must use the state law. Findlaw has a list of state overtime laws.
In addition to paying hourly employees for overtime, you may also need to pay some salaried employees. Salaried employees are usually exempt from overtime, but federal law requires that you pay overtime to lower-paid salaried employees. In general, employees whose salary is equal to or less than $455 a week ($23,660 annually) must receive overtime, even if they are classified as exempt.
If you think you might have salaried employees in this situation, you can get more details on when this overtime rule must be followed.
An example of how to calculate hourly gross pay: Let's say an employee is paid $5 an hour and worked 43 hours in a work week and you pay overtime at 1 1/2 times for all hours over 40.
- First, calculate regular pay: $5 x 40 hours = $200
- Then, calculate overtime pay $5 x 1.5 x 3 hours = $22.50
- The total gross pay for the weekly pay period is $222.50
How Gross Pay Is Used for Payroll and Payroll Taxes
As noted above, gross pay is the starting point for other calculations. In every case, the individual calculation begins with gross pay. That is, the calculations are independent of each other.
- Calculating overtime pay for hourly employees (and some salaried employees)
- Calculating and withholding federal and state income taxes
- Calculating and withholding FICA taxes (Social Security and Medicare)
- Calculating other deductions and benefits.
It is also important to figure out the taxable year for paycheck issued at the beginning of the year for work done at the end of the year. This is important because it affects the taxable income for employees, as shown in employee gross pay on the W-2 forms for each year.
Gross Pay vs. Taxable Wages
The amount on an employee's W-2 form (annual wage and tax report) is different from gross pay. The amount on Line 1 of the W-2 is "wages, tips, other compensation," and it includes all compensation including tips and taxable employee benefits.