Gross pay is the amount of money you pay an employee before any deductions are withheld, such as for taxes. It’s the basis for figuring everything from FICA withholdings to overtime wages, etc. Learning how to calculate gross pay is simple; what’s most important is that you understand the types of income that are included in the total. In short, all earnings are included, even tips and bonuses, but employer contributions and benefits are not.
Need help calculating gross pay for an employee or yourself? Here’s a free gross pay calculator:
Gross Pay vs Net Pay
Gross pay is the total earnings an employee makes before you take out tax withholdings, FICA taxes, their share of benefits payments, and voluntary contributions such as for a 401(k). For salaried workers, think of it as the amount you offered when hiring. If your employee’s salary is $45,000 a year, that is the gross pay amount. If you pay $30,000 plus commissions, the combination of the two are considered gross pay.
Net pay is the amount the employees have remaining after all the deductions are subtracted; it’s the amount you pay out when you do payroll for the period.
What’s Included in Gross Pay
Gross pay includes all earnings: wages (salary or hourly), tips, bonuses, and commissions. It also includes paid time off. Salaried employees usually have a flat rate that does not take into account hours worked. Hourly employees include overtime in gross pay. Depending on the job, for hourly employees, it can also include time spent during breaks, PTO, travel, training sessions, and even on-call.
Other components of gross pay are:
- Fringe benefits such as employer-provided cars or flights, memberships in social clubs, or tickets to sporting events provided by the employer are also added to gross benefits.
- The cost of health insurance benefits must be included in the wages of S corporation employees who own more than 2% of the S corporation.
- Employee bonuses of all kinds are also counted.
Gross pay should be agreed upon by employer and employee, whether in an employment contract, pay letter, or union agreements. This way, both parties know what to expect as far as payment for work done.
What’s Not Included in Gross Pay
Do not include employer contributions to programs such as matching funds for 401(k) or flexible spending accounts. If your employee receives benefits like health insurance or term life, do not include your contributions in their gross pay.
Gross Pay vs Taxable Income
An employee’s gross pay may differ from their taxable income (what you record on a W2 form). The IRS considers some income tax-exempt, such as voluntary contributions to 401(k) or flexible spending accounts. Therefore, what is on your employee’s pay stub as gross pay may not be the same as what shows up on Line 1 of the Form W-2.
The amount of Social Security wages may also differ from total gross wages because of deductions like wages paid through employer-sponsored disability insurance or travel reimbursements.
How To Calculate Gross Pay
For salaried employees, gross pay is the amount you offer them when hiring—for example, $45,000—plus any additional earnings like bonuses or commissions. If calculating the annual gross salary, it’s the total. If determining the gross salary for each paycheck, you divide the salary by the number of paychecks, then add any commissions, bonuses, or extra income earned during that pay period.
- Weekly: 52
- Biweekly: 26
- Semi-Monthly: 24
- Monthly: 12
For hourly employees, gross pay equals the hourly rate times the number of hours worked in a pay period, plus additional sources of income like tips, overtime, or commissions.
Example of Calculating Gross Pay for Hourly Employees
Janet works at Tapas House. She earns $10 an hour plus tips, and gets a bonus every quarter. This pay period, she also worked six hours of overtime at the time and a half rate. This is the last paycheck of the quarter, and the store did well, so she gets a $100 bonus. Therefore, her gross pay for the pay period is $990.
Week | Hours worked | Rate | Gross Pay |
|---|---|---|---|
1 | 40 | $10 per hour | $400 |
2 | 40 | $10 per hour | $400 |
Overtime | 6 | $15 per hour | $90 |
Bonus | $100 | $100 | |
Total | $990 |
Example of Calculating Gross Pay for Salaried Employees
Boris is a salesman at Montague Motors. He earns a $40,000 salary plus commissions on each sale. He is paid biweekly. This pay period, he earned $9,400 in commissions and worked 52 hours. His paycheck is $11,067.67.
Earning Type | Amount | Gross Pay |
|---|---|---|
Salary for pay period | $40,000 / 24 pay periods | $1,666.67 |
Commission | $9,400 | $9,400 |
Total | $11,066.67 |
Example of Calculating Gross Pay for Nonexempt Salaried Employees
Now, let’s imagine Boris is a nonexempt salaried employee. This just means he is protected by federal labor laws and must be paid for overtime. However, he’s also a salaried employee and will be paid for a fixed minimum number of work hours each week—in this case, 40.
To illustrate, we’ll use the same salary, $40,000 a year but break it down to find the hourly rate, $19.23 per hour ( 40 hrs. per week x 52 weeks= 2,080 annual hours; $40,000 salary / 2,080 annual hours= $19.23 hourly rate). Boris worked 92 hours these past two weeks. Twelve of those hours (92-80 = 12) are considered overtime (OT) and should be paid at the time and a half rate. In this case, the OT rate would be $28.85 per hour ($19.23 regular hourly rate X 1.5 OT rate = $28.85).
Earning Type | Hours Worked | Amount | Gross Pay |
|---|---|---|---|
Salary for pay period | 80 | $19.23 per hour | $1,538.40 |
Overtime | 12 | $28.85 per hour | $346.20 |
Commission | $9,400 | $9,400 | |
Total | $11,284.60 |
We had to add Boris’s regular pay and overtime pay to find total gross pay. Look at the difference in pay between paying him as a nonexempt salaried employee and an exempt salaried employee ($11,067 vs $11,284). He worked the same number of hours but would receive considerably more as a nonexempt employee.
Need help making other payroll calculations? Check out our guide on how to calculate payroll.
Bottom Line
It’s vital to understand gross wages because so many other calculations depend on that number, from net (take-home) pay to taxable income. In short, gross wages include the total amount you pay an employee, including overtime, commissions, and some fringe benefits. However, there are some exceptions. Gross pay also differs from taxable income.
Payroll software makes it easy to calculate gross wages and from them, taxable income and net wages. Check out our reviews on payroll software to learn more.
