Ever wondered why the large sum on your paystub is not what you take home? The reason is the subtraction of some deductions and withholdings from the initial sum. The resultant take-home for you reflects your net wages. And, the large sum reflects your gross wages. Understand your gross wages and how to calculate them here.
What are gross wages?
They are the entire total amount paid to an employee before deductions. After deductions, the resultant amount paid to the employee becomes net wages. Possible examples of deductions from gross wages include but are not limited to:
- Social security tax
- Health insurance
- Life insurance
- Pension contribution
Before any required or optional payroll deductions, an employee’s gross wages are their total compensation. Lawfully necessary deductions include those for payroll taxes, state disability insurance, and wage garnishment.
On the other hand, voluntary deductions are set up at the corporate level. In contrast to required deductions, voluntary deductions require the employee’s permission. Employee payments or contributions for health insurance, 401(k), life insurance, flexible spending accounts, and short-term disability insurance are a few examples of voluntary deductions.
What are the components of gross pay?
Depending on whether an employee is hourly or salaried, gross wages may comprise several forms of compensation. Bonuses and expenditure reimbursements are counted as gross pay for salaried workers.
Gross earnings for hourly workers include everything mentioned above as well as, optionally, travel time, training, on-call hours, and breaks. The company may choose to provide these additional benefits. On the other hand, you must factor overtime pay into the gross salary of hourly employees.
Gross compensation should include commissions and tips for both salaried employees and hourly workers. Piece-rate compensation should be included in your gross wages if it applies to your work. All compensation for time off should also be included in the gross wages (vacation pay, holiday pay or paid sick leave). Keep in mind that there are laws governing sick days.
Why should you have to understand gross wages?
Whether an individual or corporate entity, it is necessary to understand as much as possible about gross wages. Because in situations where money is needed, the information from your gross income or pay tells whether or not you are creditworthy.
When there is a wrong calculation, it can heavily impact other financial information negatively. The reason is that most financial information depends on it. So, an error in gross wages leads to wrong net wages, employer payroll taxes, paystubs, and w-2 forms, etc.
How to correctly calculate Gross wages
It is essential for both employees and employers to know how to calculate gross wages. Employees get a holistic understanding of their total pay. And employers can establish a well-managed payroll system. Gross income varies for both hourly remunerated workers and salaried workers.
How to calculate gross wages for the hourly remunerated employee
A general rule of thumb for this calculation is to multiply the number of hours worked by the hourly pay. To effectively achieve this computation, you will need to get hold of the time log. The time log gives you clear details of hours worked by the employee including working overtime. If the employee worked overtime, then the extra time or hours is also included. Having gotten the total number of hours worked by the employee, it’s time to multiply it by the agreed-upon hourly pay rate. The product is therefore the employee’s gross wage for the hourly paid worker.
Hourly gross wages= total number of hours worked x agreed upon hourly rate
For example
If an hourly employee is paid $30 per hour, works 20 hours per week, and is paid on a biweekly basis. The employee’s gross pay for the two week work period will be:
20hours x 2weeks= 40 hours in total for the work period.
Gross for the work period= 40 hours x $30
Therefore gross income= $1200 before any deductions like tax.
Assuming this same employee worked an extra 10 hour overtime of 5 hours per week for the two weeks, then his gross wages will be= 40 hours + 10 hours of overtime
Therefore total work hours including overtime = 50 hours within the two week work period so that gross wages will be 50hours multiplied by $30 to give us $1500.
How to calculate gross wages for the salaried employee
If the employee has an annual income rate, then calculating the gross income for such a worker will be achieved by dividing the total amount of the yearly pay by the number of pay periods in the year.
For example
If an employee has an annual pay of $12000 and the company has a total of 12 pay periods, it means that the gross income per pay period is $12000 /12 pay periods=$1000.
This $1000 is the gross wage for one pay period for the salaried employee. However, the gross income for the salaried employee is the annual salary. If there are other benefits provided by the firm, they will also be added to make it up. This is because we remember that gross wages mean the total earning of the employee before taxes and other deductions or withholdings.
Gross wages vs. net wages
It would be impossible to discuss gross wages without talking about net wages because they are direct opposites. As a result, it becomes necessary to run a direct comparison between both types of wages.
When there are no deductions from the total amount due to an employee, it is called gross pay or income. On the other hand, the take-home pay or amount on the employee’s paycheck after all deductions is called net wages. One must first calculate gross income and then subtract all deductions to extrapolate net wages.
In other words, net wages= gross wages – deductions.
Your employees’ gross salary serves as the basis for processing payroll. You deduct employee tax withholding and non-tax deductions from that sum. Your employees’ net pay—the sum of their paychecks—remains.
You must withhold a portion of your employees’ wages and pay them to the appropriate federal, state, and local taxing bodies as the employer. Employer taxes are another thing you must pay, but they are not deducted from the wages of your staff.
Retirement and health plan contributions, fringe perks, and wage garnishment are examples of non-taxable deductions. View our payroll deductions guide for small businesses.
When establishing your annual business budget, use gross wages. The whole picture of the expense of hiring staff is revealed when gross wages are added to your labor burden, which also includes employer-paid payroll taxes and fringe benefits.
Paystubsnow for an organized payroll
Organizing payroll and other financial documentation can be quite overwhelming, especially for paying wages. Therefore, as a business owner, accountant, or manager, an online paystub generation is an invaluable tool to prepare paycheck stubs. With Paystubsnow, one of the leading online paystub generator, you can easily document gross wages and create invoices. In addition, other employee and business financial records like paycheck stubs, w-2 forms for taxable income are easily organized. The fun part is the advantage of curating this financial information at the click of a mouse button. And having them in your email and that of your employees for easy accessibility.
FAQS:
What is included in gross wage?
In a nutshell, what is included are all of the amounts due to an employee before deductions. Things like vacation pay, bonuses, overtime pay, and all other benefits due to the employee, until deductions.
Does W-2 pay correspond to gross compensation?
The whole amount paid to an employee is referred to as gross pay, and the taxable wages are identified on a W-2 form. Employers subtract pre-taxes to arrive at taxable wages. Retirement plan payments, flexible spending accounts, and health insurance premiums are a few examples of these deductions.
For instance, if an individual earns $50,000 a year but makes $5,000 in 401(k) contributions, the W-2 only shows $45,000 in earnings.
How to compute hourly earnings’ gross compensation in a single pay period
Multiply the number of hours worked by the pay rate to get the gross salary. Include any additional earnings, such as overtime, as well.
- How to determine gross compensation for hourly wages is demonstrated in the steps below:
- Find out how many hours were actually worked.
- Subtract the hourly rate from the total number of hours worked.
- If there is overtime, multiply the number of hours worked over the allotted period by the rate of overtime pay.
- The gross compensation for that pay period is calculated by adding regular pay and overtime pay.
How do you calculate gross wages?
They are calculated for an hourly employee by multiplying the total number of hours worked by the agreed hourly rate. While for a salaried employee, it is calculated as the total annual salary before deductions. Also, if we are interested in knowing the gross income per pay period, then we divide the annual salary by the number of pay periods in the year.
Are gross wages the same as gross revenue?
Both terms are used interchangeably. However, there is a slight financial difference in the sense that; the former refers in the strictest sense to the amount earned after working. Whereas, gross revenue is specific to a business or enterprise and refers to the total amount generated from running the business, usually sales.
