What is Gross Pay?

Gross pay, or pre-tax income, is the total amount of money you are paid before taxes and deductions are taken out. That means your wages, salary, bonuses, overtime, and commission are all included in your gross pay. Gross pay is used to determine the amount of taxes owed to the government and other amounts due for deductions for benefits like health insurance. Gross pay is also used to calculate the employee’s net pay, which is the amount the employee receives after deductions.

How is Gross Pay Calculated?

Gross pay is calculated in different ways depending on the type of job a person works.

For an hourly employee, the gross pay is figured by multiplying the number of hours worked by the employee’s hourly wage. For example, if an employee worked 40 hours during a pay period at a rate of $11 per hour, their gross pay for the pay period would be $440.

For a salaried employee, the total annual salary is divided by the number of pay periods to figure gross pay. Suppose the annual salary for a salaried employee is $48,000, which would equal out to $4,000 per month. If that employee is paid twice a month, their gross pay for each pay period would be $2,000.

In addition to salary or wages, gross pay may also include overtime, bonuses, sales commission and anything else of value that the employee earned during that pay period.

What are Taxes and Deductions Based On?

All employees must pay taxes on their gross wages. That means the government takes a portion of your gross income and puts it towards social security, Medicare, and federal and/or state income tax. Most employers also offer benefits, such as health insurance and retirement plans. Any contribution towards those benefits is also taken out of the employee’s gross pay.

In order to determine the amount of taxes and deductions to be taken, employers must first know what the employee’s gross income is for that pay period. Once the specific deductions for the pay period have been applied, the employee’s net pay can be determined.

Knowing the amount of an employee’s gross pay helps employers and the employee determine how much money needs to be withheld for taxes and deductions like health insurance and retirement plans. Having an understanding of gross pay also helps employees plan for their financial future and accurately budget their money.