The total amount of money earned per paycheck before deductions occur.
Gross pay is the total amount of money earned per paycheck before deductions occur. Usually, this paid amount mentions an employee's standard pay rate or salary, including any overtime during a pay period.
When we receive our paycheck from our employer, almost all of us notice one thing in the salary, which is a section called gross pay. Have you ever wondered what it is? We will talk about it throughout the article.
This payment is essential, and every employee should know how to calculate it. When employees understand how to calculate it, this helps them gain insight into their total annual salary and provides an idea of how accurately they are getting paid for their handwork.
In other words, this pay is the amount of the wage or salary an employee earns before any contributions or deductions are made from the total earnings. Therefore, it is also known as (gross income) or (gross salary).
It is considered an individual's total income before subtracting federal medicare and social security taxes,, state and local income taxes, retirement contributions, health and dental insurance premiums, contributions to flexible spending accounts, and other obligations.
Employees only get access to their gross pay to pay bills like rent, electricity bills, mortgages, etc. Whether the employee gets paid weekly, bi-weekly, or monthly, the definition of it remains unchanged.
But on the other hand, the compensation an employee receives on each check may change based on their performance. For example, if employees work overtime every day, this will affect their pay.
Some people think both gross and net pay is the same, but that is completely wrong. They both have some differences between them.
Net pay is the payment that an employee gets after the payroll; the amount an employee can take home is available in the bank after the payroll check gets clearance. That's why it is also known as (take-home money). Gross pay is different from this.
As we have already discussed, this pay is the total income of an individual before the subtraction. Employees only get access to their pay so that they can pay their bills.
If the employee's salary is $40,000 a year, that is the gross salary of that employee. Adding these two is considered gross income if they are paid $35,000 with commissions. This payment changes depending on the performance of the employee.
Net pay is the amount the employees have remaining after all deductions are made; it's the amount they get paid out when they get payroll for the period.
Gross salary can be described in many ways and is calculated in financial documents. But first, it is the pay you offer employees when you hire them.
For example, this payment is known as $30,000, including any bonuses or additional earnings overall.
Determining this pay is simple math. First, we divide the annual salary by the number of paychecks, then add any commissions, bonuses, or extra income earned during that pay period.
- Weekly payment: divide by 52 (number of weeks in a year)
- Biweekly payment: divide by 26 (every two weeks)
- Semimonthly payment: divide by 24 (twice a month)
- Monthly payment: divide by 12 (number of months in a year)
For hourly payment, the formula would look like the below
Gross pay = (Hourly rate x The number of hours worked in a pay period) + Additional sources of income like overtime, tips, commissions, etc.
Knowing which payroll costs can be included in this calculation and which cannot is crucial. Employees need to care for the pay they agreed on as it is the amount employers agreed to pay them for their contribution towards the company.
The employer and employee must agree on the amount before signing the employment or other contracts. This way, both parties will know what to expect in the name of payment for particular works.
Understanding How to Calculate
It is often automatically calculated by the employer's payroll system. The calculation is not very complex and can easily be computed. This calculation is used both manually and automatically in Excel. It can be expressed manually as below:
1. Analysis of the Employees' Salary
Employees can also calculate their salary by themselves if they want to confirm their salary amount. The basic formula for manual calculation is:
Gross pay= Annual salary payment / Number of payment periods
For example, if an employee gets $120,000 and receives 12 paychecks throughout the year, then according to the formula, they should get $10,000 per month.
2. Hourly Calculation
The formula for hourly calculation is expressed as:
Gross pay = Hours worked in a pay period × Hourly rate (+ Overtime hours × Hourly overtime rate)
According to the formula of hourly payment, when in a pay period, an employee works 80 hours with an hourly rate of $62.50/hour, then the amount should be $5,000 a month.
Gross income is the amount employees get before payroll deductions. Deductions get split between the employee and employer. The employer takes care of some business, income, and FICA taxes, while the employee is responsible for other activities.
Taxes and Fees:
- Payroll Taxes: Payroll tax consists of four of the most common taxes such as social security, , unemployment, and medicare.
- Social Security Taxes: Social security is a system that employees and employers must pay. Both employees and employers must pay 6.2% each of social security tax.
- Medicare: Every employed individual must pay a rate of 1.45% into medicare from their pay.
- Retirement and Insurance: Employees contribute to retirement and insurance, and these costs are paid from their pay. Such payments are valuable as they will bring benefits following retirement.
- Health Insurance: Every employed individual needs health insurance plans. Many employees pay a fixed amount into the health insurance plans per paycheck, while some pay premiums.
- Life Insurance: Life insurance usually changes with the employee's job situation. The limit of life insurance expires when the employee changes jobs.
- Retirement Investments: Employees may qualify for plans like retirement investments and get benefits after retirement. The mostly used retirement plan is 401(k).
All of us employed persons are required to pay taxes every year. When we file for taxes, some of us might have noticed that the W-2 form lists different amounts of gross income than what we expected to earn throughout the year.
This happens because all the pretax incomes are not considered gross pay; thus, they don't get counted. In addition, this pay may vary from employee to employee due to their contributions to the company.
An employee's gross pay may vary from their taxable income, which is recorded in the W-2 form. However, taxable income plays a very crucial role. Taxable income is the small portion of the gross income that helps to calculate the amount needed to be paid in a given tax year.
The IRS considers some of an employee's income tax-exempt, such as voluntary 401(k) contributions or flexible spending accounts.
This is why this pay is presented differently in the form of a W-2. The amount of social security is the same as income taxes, which means that it also differs in the form from the expectation.
It gets its place in the, which is a financial document. It can be calculated in different ways depending on the nature of the payment.
- Gross pay or gross salary is an employee's salary or wage before any types of deductions or taxes are deducted.
- This payment is so crucial that all other estimations and calculations which are relevant to taxes and compensations begin with it.
- The amount of compensation an employee receives on each check may change with their performance, such as if employees work overtime every day, this will affect their pay.
- This pay might differ from taxable wages.
- Gross pay can be calculated in different ways depending on the nature of the payment and gets its place in a financial document like an income statement.
Article researched and authored by Mehnaz Tarannum | LinkedIn
Reviewed and Edited by Ayah Murshidi | LinkedIn
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