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Summary: Gross pay is the income an employee earns for the work they do in a set period before taxes, benefits, and other deductions are subtracted. Gross pay can also be called gross income or gross earnings.
Gross Pay
Gross pay is the income an employee earns for the work they do in a set period before taxes, benefits, and other deductions are subtracted. Gross pay can also be called gross income or gross earnings.
How is it calculated for employees?
Gross pay can be calculated by dividing the employee’s salary over a set number of pay periods or multiplying a wage by the number of hours or days worked.
Gross salary calculation by dividing salary
Using an annual salary of $60,000 as an example, this is how to calculate a gross salary:
There are 12 months in a year, therefore the gross monthly salary of this employee would be $60,000 / 12 months = $5,000/month.
There are 52 weeks in a year. If the employee is paid weekly, their gross weekly salary would be:
$60,000 / 52 weeks = $1,153.84/week
If the employee is paid bi-weekly, we need to divide 52 weeks by two to get 26 two-week periods per year. Therefore, the employee’s bi-weekly salary would be $60,000 / 26 weeks = $2,307.69/bi-weekly.
Gross salary calculation by multiplying wage
Using an example of an hourly wage of $30/hour, this is how to calculate gross salary:
If an employee works 160 hours in a month, their gross salary that month would be:
$30/hour x 160 hours = $4,800/month
In some cases, employees are paid daily.
If an employee is paid $200/day and works 22 days/month, their gross salary would be:
$200/day x 22 days = $4,400/month
How is gross pay different from net pay?
Gross pay is what is normally advertised in job postings and written into employee contracts. It represents a real financial commitment from the employer to the employee.
However, an employee rarely, if ever, receives their total gross pay.
Instead, the employee receives net pay, or take-home-pay, which is what is left of their gross pay after taxes, benefits, and other deductions have been made. These deductions can include:
- Taxes (local, state, and federal)
- Social Security contributions (unemployment insurance, Medicare, etc.)
- Insurance premiums (health, dental, life, etc.)
- Retirement savings contributions
- Wage garnishments (court-ordered deductions to pay debts, child support, etc.)
Let’s use the example of an employee whose gross pay is $5,000/month, paying in the 22% tax bracket and making social deductions at 7.65%.
This is how their net monthly income would be calculated:
| Gross income | $5,000.00 |
| Tax withholdings | -$1,100.00 (5,000 x 0.22) |
| Deductions | -$382.50 (5,000 x 0.0765) |
| TOTAL | $3,517.50 |
In this example, an employee with a gross salary of $5,000/month would expect to take home a net pay of only $3,517.50 monthly.
How do overtime, bonuses, and other incentives impact an employee's gross pay?
While taxes and other deductions must be subtracted from gross pay to end up with net pay, other items are added to salary to increase gross pay. Overtime hours, for example, are paid at a premium, which is a percentage of the worker’s normal hourly wage. Incentives and bonuses for teams hitting sales targets may be added as lump sums or percentages of gross pay.
It’s important to note that all of these extra amounts are typically added to gross pay before tax withholding, and other deductions are calculated to produce net pay.
What are the implications of gross pay for employee compensation planning and budgeting?
Job openings advertise gross pay, and contracts stipulate gross pay in their terms. When the term “salary” is used, it means gross salary before deductions. However, employers typically have to pay more than just salary to employ workers. They normally also need to make contributions to social schemes on a worker’s behalf.
For example, the US Federal Insurance Contributions Act (FICA) requires employers to contribute to Medicare and Social Security schemes at a rate of 7.65% of gross salary. Many states also mandate employer contributions to retirement savings plans. This means that employers have to budget for salaries as well as these contributions.
For example, an American company hires a worker at a monthly salary of $5,000/month. However, it has to pay 7.65% in FICA contributions and another 6% for a 401(k) retirement savings plan.
The employer would, therefore, have to budget:
| $5,000 | Salary |
| $382.50 | FICA |
| $300 | 401(k) |
For a total of $5,682.50/month to hire this employee.
Andrew (Drew) joined the Remote People team in 2020 and is currently Director, Regulatory Affairs. For the past 13 years, he has been a trusted advisor to C-Suite executives and government ministers on international compliance and regulatory issues. Drew holds a law degree from the University of Otago, a PhD from the University of Sydney, and is an enrolled Barrister and Solicitor of the High Court of New Zealand.
