What Is Gross Pay?

Gross pay refers to the total amount of wages that an employee receives before taking out taxes and other deductions like social security, Medicare, insurance, and other contributions to retirement accounts or philanthropic organizations. Gross pay includes:

• Wages based on the annual or hourly rate that the employee is paid
• Commissions
• Sick pay
• Bonuses
• Holiday pay
• Shift differentials
• Piece rate pay

Learn more: What You Need to Know to Understand Your Paycheck

Gross pay is the total amount you earn at your job before any income is taken out. If you make $10 per hour and work 20 hours per week, your gross pay is $200 per week. Your gross pay also includes any bonuses, commissions, or tips you earned during that pay period. Based on the previous example, if you earned $100 in tips during the course of a week, on top of your $10 per hour rate, your gross pay for that week would be $300.

Understanding gross pay is important for making educated financial decisions. While you may earn $50,000 as a salaried employer, for example, it’s important to recognize that that isn’t your take-home amount. Recognizing this can help you make decisions about how much you should withhold from your paycheck, including how much you should automatically have withdrawn for retirement savings.

Gross wages are necessary when calculating taxes and other types of deductions, since they’re based on gross pay. Companies start with pre-tax deductions, subtracting any fixed amounts that you may have chosen to take out of each paycheck. For example, you may choose to take a certain dollar amount out of every paycheck to contribute to your retirement accounts or a health savings plan. Your deductions could also be a certain percentage of your gross pay.

After removing your pre-tax deductions, the employer will then withhold your employee taxes, which are typically a percentage of your gross pay after your pre-tax deductions have been subtracted. After subtracting taxes, the employer will withhold any post-tax deductions, if there are any. These could be a percentage of your wages, or they could be a fixed dollar amount. The amount that’s remaining is the employee’s net pay.

Learn more: It’s Time For Your Annual Salary Checkup

How you calculate gross pay will vary slightly based on whether you are paid on an hourly or salary basis:

How to calculate gross wages for hourly jobs

For hourly employees, you must:

1. Add up the number of hours you worked within a single pay period.
2. Multiply the number of hours you worked by the hourly rate.
3. Add overtime pay, tips, bonuses, and other forms of compensation.

How to calculate gross wages for hourly jobs

To calculate gross pay as a salaried employee, you need to:

1. Determine the total number of pay periods in the year. If you are paid twice per month, for example, you would have 24 total pay periods.
2. Divide your salary by the number of pay periods.
3. Add any overtime pay, bonuses, reimbursements, and other forms of compensation you received within the specific pay period you’re calculating.

Learn more: Why Compensation Is More Than Just Salary

Gross pay is the amount of money that employees receive before taxes and deductions are taken out. Net pay is the amount of income that employees receive after taxes and deductions are removed, or the money they actually receive in their paycheck. You’ll see both terms listed on your pay stub. Gross pay typically appears at the top along with a list of deductions, while net pay is generally listed at the bottom.

Your gross pay could differ from the wages that are reported on your W-2 form for the IRS. On line one of the W-2, you’ll see wages, tips, and other compensation. This line includes all types of compensation that you receive from your employer. Additionally, the wages listed on your IRS form can be different from your gross income because of pre-tax deductions, including:

• 401(k) contributions
• Medical premiums
• Contributions to flexible spending accounts
• Dependent care

Overtime pay is 1.5 times the employee’s hourly rate and applies for any hours that an employee works during a week over 40 hours. Most employees who are paid an annual salary are exempt from overtime unless the employer chooses to voluntarily pay overtime.

If an employee who earns an annual salary is being paid overtime, the employer would first need to calculate the employee’s hourly rate. To do this, you would divide the annual salary by 52 weeks and then again by 40, the number of hours in a regular workweek. After that, you would multiply the number of hours that you worked over 40 hours by 1.5 to determine your overtime rate.

You need to calculate overtime pay if you’re calculating your gross income. To do this, you would calculate the hourly or annual gross pay and then add the additional overtime pay that you worked during that pay period.