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).
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 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 and 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. Hours worked may include waiting time, on-call time, rest and meal breaks, travel time, and training sessions. Overtime pay is also included in the gross pay calculation (see 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 the employee is paid twice a month, the gross pay for each of the 24 pay periods is $1250.
Net pay is the employee's take-home pay. Net pay equals gross pay minus withholdings and deductions.
Overtime and 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 at any lower rate. If your state has overtime regulations that higher than the federal requirements, you must use state law. Check with your state's labor office for details
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. Effective January 1, 2020l, employees whose salary is equal to or less than $684 a week ($35,568 annually) must receive overtime, even if they are classified as exempt.
Exempt vs. Non-exempt Employees
The terms "exempt" and "non-exempt" refer to whether the employee is eligible for overtime. Hourly employees are non-exempt, always eligible for overtime. Salaried employees may be exempt from overtime if their annual wages are above a specific amount. This article on overtime rules explains the requirements.
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.
Gross pay for an employee may be different from wages shown on an employee's W-2 wages. 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.
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 paychecks 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.
Michigan State University. MSU Extension. "Gross pay versus net pay; Do you know the difference?" Accessed Mar. 7, 2020.
U.S. Department of Labor. "Fact Sheet #22.: Hours Worked under the Fair Labor Standards Act (FLSA)." Accessed Mar. 7, 2020.
U.S. Department of Labor. "Overtime Pay." Accessed Mar. 7, 2020.
U.S. Department of Labor. "Final Rule: Overtime Update." Accessed Mar. 7, 2020.
IRS. Publication 15 (Circular E). 15. Special Rules for Various Types of Services and Payments, Pages 38-42. Accessed oct. 5, 2019.