When you run payroll, everything starts with gross pay. Gross wages are what attracts many people to a job. Gross wages are how you calculate an employee’s deductions and taxes on their wages. And, they are how you determine an employee’s take-home pay.
Gross wages definition:
Gross wages are the total amount you pay an employee before you withhold taxes and other deductions. Because of payroll withholdings, an employee’s take-home pay can be significantly less than their gross earnings.
You can calculate an employee’s gross pay for different periods of time. You will normally calculate an employee’s gross pay for your pay period. But, you can also calculate gross pay annually, quarterly, monthly, daily, or for any other period of time.
How to calculate gross pay
How you calculate an employee’s gross pay will depend on if you pay them hourly wages or a salary.
Gross earnings for hourly workers
For hourly employees, you can calculate gross wages by multiplying the hourly wage by the number of hours worked in the period.
Let’s say you have an employee who earns $10 per hour. You want to calculate their gross wages for one workweek. The employee worked 40 hours during the workweek. In this situation, the employee’s gross wages are $400 ($10 X 40).
If an hourly employee works overtime, the overtime pay is included in the gross pay. If the employee in the previous example worked five overtime hours, you would add $75 in overtime wages (5 X ($10 X1.5)). This would make the total gross wages $475.
Gross pay for salary workers
For salaried employees, start with their annual salary to calculate their gross wages. Then, divide the annual salary by the number of periods in the year. For example, if you want to calculate monthly gross wages, you will divide the annual salary by 12 because there are 12 months in the year.
Let’s say you have an employee who earns $45,000 per year. You want to calculate their biweekly gross wages. There are 26 biweekly periods in the year, so divide $45,000 by 26. The employee’s biweekly gross wages are $1,730.77.
When gross income is needed
You need to know your employees’ gross wages so you can calculate taxes and other deductions. Employee pay deductions are based on the gross pay.
You’ll start with pre-tax deductions. As the name sounds, these are deductions you subtract from the gross pay before you withhold taxes. Pre-tax deductions might be a fixed amount, such as $50 subtracted from each paycheck. Or, the deductions might be a percentage of the gross pay.
After pre-tax deductions, you will withhold employee taxes. Taxes are often a percentage of the employee’s gross wages minus pre-tax deductions, but in some cases, you will withhold a fixed amount.
You will also use the employee’s gross wages to calculate your employer taxes. These taxes are a percentage of the employee’s pay.
After taxes, you will withhold post-tax deductions. You will subtract post-tax deductions from gross wages, after subtracting pre-tax deductions and taxes. Like pre-tax deductions, these deductions might be a fixed amount or percentage.
Gross wages vs. net wages
Gross wages are what an employee earns before deductions. Net wages, or net pay, are what an employee earns after deductions. Net wages are what an employee takes home on their paycheck.
It’s easy to calculate net pay. Simply subtract all taxes and pre- and post-tax deductions from the gross wages.
Net Wages = Gross Wages – Deductions
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This article is updated from its original publication date of 1/26/2015.
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