New year, new payroll! Get 3 months free when you switch to Homebase Payroll.Get Started
New year, new payroll! Get 3 months free when you switch to Homebase Payroll.Get Started

Gross wage: What it is, why it matters, and how to calculate it

Payroll and finances are among the many processes small business owners need to be familiar with for business sustainability and success.

It’s vital to understand how to pay employees and what percentage of their income you have to withhold to cover taxes and deductions. And, it’s equally important to calculate payroll accurately so you can budget wisely and avoid surprise payments in the future.

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 means, how to calculate it, and why it should matter to you.

Gross wage is the amount an employee earns before any kind of taxes, benefits, or deductions.

Generally, you’ll be talking about gross wage any time you’re discussing compensation with a new hire who’ll earn minimum wage or offering existing employees a raise.

The amount of tax both you and your employees pay is based on gross wage.

Understanding gross wages as an employer

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.

Gross wage breakdown: What’s included?

You might be wondering, what exactly falls under gross wage?

Here are some examples of what gross wage can include:

  • Salaries
  • Hourly wages
  • Piece rate pay (when an employee is paid a fixed amount for a piece of work, like a project or gig)
  • Overtime
  • Commissions
  • Tips and bonuses
  • Vacation pay
  • Sick pay

What can be deducted from gross wage?

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.

The key difference between gross wages and net wages

Net wage is often called ‘take-home pay’ because it’s the amount employees keep after all deductions listed on their pay stubs.

Usually, the more you earn, 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
Texas $50,000 $4,167 $2,957
New York $100,000 $8,333 $4,912
California $120,000 $10,000 $5,891
Indiana $80,000 $6,667 $4,274

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.

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.

GRAPHIC BRIEF

 

Dimensions Landscape = 1200 x 628
Description of image A graphic table that shows the starting gross wage with all the deductions and remaining total

The first row shows an example of how to deduct pre-tax deductions. The second row shows an example of how to deduct federal and state taxes. The third row shows an example of how to account for post-tax deductions.

Inspiration or reference image https://www.patriotsoftware.com/blog/payroll/how-to-calculate-local-income-tax-withholding/

Your sketch (upload it in the graphics folder + set access to “Anyone with link can access”)
How to Calculate Taxes and Deductions from Gross Wages
Step 1: Subtract pre-tax deductions Step 2: Withhold employee federal taxes Step 3: Account for other post-tax deduction
Gross pay = $5,000/month

10% for 401k = $500

Private medical plan = $100

Total pre-tax deductions = $600

$5,000

– $600

$4,400

Federal income tax = $541

State income tax = $235

FICA taxes = $304 (Social Security) and $71 (Medicare tax)

$541 + $235 + $375 = $1,151

$4,400

– $1,151

$3,249

Monthly life insurance plan = $60

$3,249

– $60

$3,189

Net pay = $3,189

Heading on graphic How to Calculate Taxes and Deductions from Gross Wages
Copy on graphic [Row 1]: How to Calculate Taxes and Deductions from Gross Wages

[Row 2, Column 1]: Step 1: Subtract pre-tax deductions

[Row 2, Column 2]: Step 2: Withhold employee federal taxes

[Row 2, Column 3]: Step 3: Account for other post-tax deduction

[Row 3, Column 1]: Gross pay = $5,000/month

10% for 401k = $500

Private medical plan = $100

Total pre-tax deductions = $600

$5,000

– $600

$4,400

[Row 3, Column 2] : Federal income tax = $541

State income tax = $235

FICA taxes = $304 (Social Security) and $71 (Medicare tax)

$541 + $235 + $375 = $1,151

$4,400

– $1,151

$3,249

[Row 3, Column 3]: Monthly life insurance plan = $60

$3,249

– $60

$3,189

Net pay = $3,189

Image source/credit NA
Notes The reference image just serves as loose inspiration. Our design will be a landscape graphic with fewer steps.
Image caption Include the graphic’s caption (optional)
Alt text for image A graphic table that shows the starting gross wage with all the deductions and remaining total

The first row shows an example of how to deduct pre-tax deductions. The second row shows an example of how to deduct federal and state taxes. The third row shows an example of how to account for post-tax deductions.

Due Date

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.

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

Caption: Process payroll easily 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. 

Related posts

How PTO works for hourly employees

Knowing how PTO works for hourly employees can benefit both the employer and the employee. For the employer, it can…

Read article

Top 5 retail scheduling software in 2023

Scheduling shifts for your retail business should be simple, but in reality, it can quickly turn into a logistical nightmare….

Read article

Best retail payroll software services and how to choose what’s right for your small business

Do you find that manually running payroll for your small retail business is time-consuming and stressful? If you’re thinking yes,…

Read article

Employee communication in restaurants: What you need to know

Restaurant owners know their businesses can’t thrive without great communication, and yet it’s not always easy to know what good…

Read article

Restaurant management 101: Tips to manage a restaurant successfully

Restaurant management can be an exciting career path for anyone who’d like to open their own restaurant one day, or…

Read article

Back of house: What you need to know about hiring, and fostering a sustainable BOH culture

If your restaurant is experiencing a greater need for back of house (BOH) staff like chefs and line cooks, you’re…

Read article
Create and share team schedules instantly with Homebase.
Plus, get 3 months of Homebase Payroll for free!
Try Homebase for free