Gross pay for an employee is the amount of their wages or salary before any taxes or deduction are taken out, and it is the starting point for other calculations. These calculations are independent of each other and can include:
- 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
For those in their working years, it's especially important to know how gross pay works. Learn more about gross pay so you can better understand your compensation and potential tax liabilities.
What Is Gross Pay?
Gross pay is the total amount of money an employee receives before any taxes or deductions—such as retirement account contributions—are taken out of their paycheck. All other calculations for employee pay, overtime, withholding, and deductions are based on gross pay. For both salaried and hourly employees, the calculation is based on an agreed-upon amount of pay. 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, it might be in an employment contract or pay letter. In each case, the gross pay rate should be agreed to and signed before the employee begins working.
How Do You Calculate Gross Pay?
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, overtime, and training sessions. 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.
How Gross Pay Works
For an hourly employee, let's say an employee is paid $10 an hour, worked 43 hours in a workweek, and overtime pays $15 for all hours over 40. You would do the following steps:
- Calculate regular pay ($10 x 40 hours = $400)
- Calculate overtime pay ($15 x 3 hours = $45)
- Add them together
In this scenario, the employee's gross pay would be $445 for the week. For a salaried employee with an annual salary of $50,000 who gets paid biweekly, divide $50,000 by 24 (the number of pay periods in a year) to get $2,083.33—the gross pay for each pay period.
Net pay is the employee's take-home pay. Net pay equals gross pay minus withholdings and deductions.
Gross Pay vs. Taxable Wages
The amount on an employee's W-2 form 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 because some pretax deductions aren't considered taxable income. This includes:
- Contributions to employer-sponsored retirement plans like a 401(k)
- Contributions to a flexible spending account
- Medical premiums
- Dependent care
Limitations of Gross Pay
The amount of Social Security wages for FICA tax on the employee's W-2 may differ from the total gross pay and wages for tax purposes. Deductions that affect FICA wages include:
- Wages paid to a worker through employer-sponsored disability insurance
- Reimbursements for employee travel expenses, if within the amounts for per diems or the standard mileage
- Family employees under age 18 (21 for domestic work)
- Some excess fringe benefits
- Employee insurance
- Gross pay is the amount of an employee's wages or salary before any taxes or deductions are taken out.
- All other calculations regarding compensation and taxes begin with gross pay.
- For hourly employees, hours worked may include waiting time, on-call time, breaks, travel time, overtime, and training.
- Gross pay may differ from taxable wages.
- Hourly employees must receive overtime pay for any hours over 40 for the week.