Payroll and finances are among the many processes small business owners need to be familiar with to achieve business success and sustainability.
But you don’t have to be an expert in finance to have a working knowledge of gross wage and how to calculate it. In this article, you’ll learn exactly what gross wage or gross wage means, how to calculate it, and why it should matter to you.
What is Gross Pay?
Gross Pay is the total compensation an employee receives before any deductions or taxes are taken out, including salary, bonuses, overtime pay, and commissions.
Generally, you’ll be talking about gross wage any time you’re discussing compensation with a new hire who will earn minimum wage or when offering existing employees a raise.
The amount of tax both you and your employees pay is based on gross wage.
Gross Pay vs. Net Pay
Gross pay is the amount employees earn before taxes and other deductions are taken out. Net pay is the amount employees actually take home after taxes and deductions have been subtracted.
For example, if your employee makes $60,000 a year before taxes and $15,000 is taken out for taxes and other deductions, their net pay would be $45,000. This means they only take home $45,000 even though they earned $60,000 because some of the money was taken out for taxes and other deductions.
Usually, the more an employee earns, the higher taxes and withholdings will be.
To visualize the difference between gross pay and net pay, here are some examples for different salaries:
|State||Annual Salary||Monthly Gross Pay||Monthly Net Pay|
Understanding Gross Wages as an Employer
Understanding gross pay and how it’s calculated helps you figure out the total cost of employing someone. It also helps you make a budget for employee compensation and ensure you’re compliant with labor laws and regulations.
Accurately calculating and reporting gross pay also helps you build trust with your employees, which can make them happier at work and less likely to leave their job.
Employers who understand gross pay will find managing payroll and finances easier:
- Negotiating salaries: You’ll be better positioned to negotiate salaries with employees.
- Budgeting: Having an accurate record of income means you can set a realistic budget.
- Making predictions: You can forecast future earnings without worrying about surprises like unpaid taxes.
- Saving time: When you pay the correct amount of tax, you won’t have to spend time fixing mistakes in the future.
What’s Included in Gross Wage?
Here are some examples of what gross wage can include:
- Salaries: A salary is a fixed compensation paid periodically to an employee, usually monthly or bi-weekly, regardless of the hours worked. It’s predetermined and agreed upon between the employer and the employee. Since it’s not dependent on the number of hours worked, salaried employees receive consistent paychecks, facilitating financial planning and budgeting.
- Hourly Wages: Employees who receive hourly wages are compensated for each hour they work. The total payment is determined by multiplying the hourly rate by the total hours worked in a given period. Unlike salaried workers, the pay of hourly employees can fluctuate, depending on how many hours they’ve worked during a pay cycle.
- Piece Rate Pay: Employees who receive piece rate pay are compensated based on output or productivity, rather than hours worked. This means an individual is paid a specified rate for each unit of product they produce or task they complete. For instance, a graphic designer might be paid for each logo they design.
- Overtime: Overtime pay is additional compensation awarded to employees who work beyond the standard hours set by the company or the government. Typically, in many countries, this is beyond a 40-hour work week. Overtime rates are often higher than regular hourly wages, often at one and a half times the standard hourly rate.
- Commissions: Commissions are a type of compensation tied to the sales an employee makes or to the completion of specific tasks. For example, a real estate agent might earn a commission when a house is sold. This mode of compensation can motivate employees to perform at their best since their earnings are directly related to their performance.
- Tips and Bonuses: Tips are additional payments given directly to service workers by clients or customers for a job well done. It’s common in sectors like hospitality. Bonuses, on the other hand, are additional payments given by the employer, typically as a reward for good performance or during certain times of the year.
- Vacation Pay: Vacation pay is compensation for the days an employee is permitted to take off from work and still receive their usual pay. It’s a way for employers to ensure that their staff can rest and rejuvenate without financial stress.
- Sick Pay: Sick pay is the compensation provided to employees when they can’t work due to illness. It’s a means to support the financial stability of an employee when they’re unwell. Providing sick pay can also encourage workers to take the necessary time off to recover, preventing the spread of illnesses in the workplace.
What Can Be Deducted From Gross Wages?
Gross wages are subject to a long list of possible deductions. Some of them apply to all employees, whereas others are only necessary in certain circumstances.
Here are some common examples:
- Federal income tax: This is the nationwide tax, and it’s calculated with a bracket system. It increases proportionally based on people’s income.
- State income tax: Each state charges a certain percentage of state payroll taxes, except for Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, where there’s no state income tax.
- Social security: Employers and employees each contribute 6.2% of wages towards social security, up to the taxable maximum of $147,000.
- Medicare: Employers and employees contribute 1.45% each for Medicare. Social security and Medicare fall under the Federal Insurance Contribution Act (FICA).
- Retirement plan contributions: If employees have a retirement plan like a 401k, an amount will be deducted from their gross wage every month to contribute to it.
Wage garnishments: This happens when a percentage of someone’s earnings must be withheld due to a court order, which may be issued because of credit card debt, student loan debt, child support, alimony, and medical bills.
How to Calculate Gross Wages
How you calculate gross wage depends on whether you pay employees by the hour or with a monthly salary.
Calculating Gross Wage for Hourly Employees
To calculate gross wages for hourly employees, you have to multiply their hourly rate by the hours they’ve worked during the pay period.
Gross Pay for Hourly Workers Example
For instance, a part-time employee who works 48 hours in a month at $14 an hour, will have a gross pay of $672. You also have to include overtime pay in that calculation if applicable. So, if that same employee worked another 10 hours of overtime, at a rate of time and a half (1.5x their regular wage), they’d earn an extra $210.
Calculating Gross Wage for Salaried Employees
For workers earning a salary, calculate their gross income by dividing their annual salary by the number of pay periods in a year.
For example, if someone earns an annual salary of $60,000 and gets paid every month, their gross pay would be $5,000.
Once you know your employee’s gross wages, you can calculate the total amount of taxes and deductions that have to be withheld.
Here’s how — using a California employee with a salary of $60,000 as an example.
Step 1: Subtract Pre-tax Deductions
First, deduct all pre-tax deductions from your employee’s gross pay. Pre-tax deductions are subtracted before tax is withheld, and they can reduce the amount of tax your employee has to pay.
Pre-tax deductions include things like health insurance premiums, 401k contributions, disability allowance, and childcare expenses.
An advantage of pre-tax deductions is that they reduce reportable income, lowering taxes due.
If our example employee in California contributes 10% of their salary to a 401k and pays $100 for a private medical plan, for instance, they’re left with $4,400 as a taxable income.
Step 2: Withhold Employee Federal Taxes
Next, you deduct the amount of federal tax your employee has to pay based on the amount you’re left with after pre-tax deductions.
In this case, the employee would pay $541 in federal income tax (10.83%) and $235 (4.7%) in state income tax.
They’ll also have to pay FICA taxes: $304 for social security (6.08%) and $71 (1.42%) for medicare tax.
Step 3: Account for Other Post-tax Deduction
Finally, subtract any post-tax withholdings, which include things like court-ordered payments for childcare, alimony or debt repayment, as well as employer-sponsored pension plans or insurance.
Gross Pay For Salaried Workers Example
Say our example employee pays a post-tax deductible of $60 a month for life insurance.
After all the taxes and contributions are deducted, the employee earning $60,000 a year has a net pay of $3,314 out of a gross pay of $5,000.
Managing The Payroll Process Is Easy With Homebase
To save yourself from headaches and spend less time doing payroll calculations, use a handy tool like Homebase. You can automate the whole payroll process, including calculating wages and taxes — and sending the correct payments to employees, the state, and the IRS.
Here are a few more ways Homebase makes payroll a breeze:
- It’s built for teams with hourly workers, so calculating gross and net pay is equally easy for part-time and full-time employees, whether they receive hourly pay or a salary.
- Convert employee timesheets straight into wages. As employees clock in and out, Homebase calculates their number of hours and pay — overtime hours and breaks included.
- Automatically send the correct payments to employees, the state, and the IRS.
- Process your tax filings and issue 1099s and W-2s with zero hassle.
- Employees can sign forms electronically. It’s safe and secure, and reduces paperwork for you.
Homebase is more than just a payroll software. It can help you manage all aspects of HR, including scheduling, communication, compliance, hiring, and onboarding, so you can streamline your operations and spend more time doing what you love
Frequently asked questions about gross wage
How do gross wage and net wage affect your taxes as an employer?
Your employer taxes are based on your employees’ gross wages, not their net wages.
In addition to employer taxes, you’re responsible for paying half of your employees’ FICA payroll taxes, 7.65% of your gross pay. 6.2% of gross wages also go toward your employees’ social security and 1.45% goes towards Medicare.
What is the adjusted gross wage?
Adjusted gross wage is your employees’ wages after pre-tax deductions have been made but before tax has been withheld.
Do gross wages include social security?
Yes. Social security payments are deducted from gross salary and are around 6.2% for both the employer and employee.
What is the difference between gross wages and taxable wages?
Gross income is all the income an employee receives that isn’t exempt from taxation. Taxable income is the portion of your gross income that’s subject to taxation.