What is gross pay?

If someone asks you, “What is gross pay?” the answer is that it’s the amount of pay an employee earns before taking out any deductions, such as taxes or health insurance premiums. If you have salaried employees, you can express their gross pay in terms of the yearly base salary they receive. If you make someone a job offer for $75,000 per year, their yearly gross pay would be $75,000. You can also break gross pay down by pay period. For hourly employees, the gross pay is the hourly rate times the number of hours worked.

How to calculate gross pay

Calculating gross pay is relatively easy since the answer to, “Is gross before taxes or after?” is that it’s before. You simply figure out how much the employee earns based on their salary or hourly pay. The calculation is the same for every pay period for salaried employees, but it changes for hourly employees.

Gross pay for salaried employees

As previously mentioned, the gross pay for a salaried employee is simply the salary you offer them. You can break it down to a monthly or weekly gross pay amount as well.

Say your employee has an annual salary of $60,000. To figure out their gross monthly salary, divide that amount by 12. That means their gross monthly salary is $5,000. To calculate a weekly gross salary, divide $60,000 by 52. That works out to $1,153.84 per week. If you pay your employees twice a month, you’ll have 24 pay periods per year. Divide the total salary by 24 to calculate the gross amount per pay period. In this example, it would be $2,500.

Remember, this isn’t the amount the employee takes home; it’s the amount they earn before any deductions are taken. While you’ll pay the full $60,000 per year, the employee receives less once you take out deductions.

Gross pay for hourly employees

The gross pay for hourly employees can fluctuate depending on how many hours the employee works each pay period. To calculate gross pay for an hourly employee, multiply the hourly rate they receive by the total number of hours worked in a certain period. If an employee earns $17 per hour and works 40 hours in a week, their gross pay for that week is $680. If you use a biweekly pay period and the employee works 68 hours during those two weeks, their gross pay for that period is $1,156.

Overtime pay can affect the gross pay for hourly employees, as the hours worked beyond the normal workweek are calculated at a higher pay rate. To get the total gross pay, you add together the regular wages and the overtime pay. For example, if an employee earns $850 in regular pay and $240 in overtime pay during a pay period, their total gross pay for that period is $1,090.

To figure out the yearly gross pay for an hourly employee, you’ll need to add up the total amount they earn for every pay period of the year, before deductions.

What is net pay?

Net pay is the amount of pay that’s left after you take out taxes and all other deductions from an employee’s gross pay. It’s the take-home pay that your employees earn. The calculations can vary for each employee since the types and amounts of their deductions can differ.

How to calculate net pay

Net pay calculations will vary depending on the deductions each employee has. The deductions may differ based on the benefits you offer. For example, if you offer optional dental coverage or life insurance, some employees might opt to buy those coverages, which means they’ll have more deductions. Others might opt out, so they won’t have as much money taken out of their paychecks.

The general formula to calculate net pay is:

Gross pay – deductions = net pay

Here are the steps for calculating net pay for each employee:

1. Calculate any pretax deductions for the employee. This total varies depending on the voluntary benefits each employee chooses and the cost of those benefits.
2. Subtract that total from the gross pay for the pay period. For example, if an employee earns $2,000 gross pay for the period and has $275 in pretax deductions, you’re left with $1,725.
3. Use the amount left after pretax deductions to calculate payroll taxes. This includes federal tax withholdings, state tax withholdings and FICA payroll taxes.
4. Subtract the mandatory tax amounts from the remaining amount.
5. Calculate wage garnishments if the employee has a mandatory garnishment. Subtract this from the remaining amount.
6. Calculate any voluntary posttax deductions. Subtract that total from the remaining amount.

Once you’ve subtracted all mandatory and voluntary deductions, you’re left with the net pay for the period. This is what your employee receives on their paycheck. You can calculate the individual’s yearly net pay by adding up their net pay amounts for each pay period.

Types of deductions

Some deductions come out before taxes, while others come out after taxes are deducted. Pretax deductions are taken out of the gross pay before you calculate mandatory taxes. These pretax deductions reduce the amount of taxable income your employee has, thus lowering the taxes they pay.

Some voluntary deductions don’t qualify as a pretax calculation. They come out of an employee’s paycheck after you’ve calculated and subtracted the mandatory taxes. Their net pay is what’s left after you take out all types of deductions and taxes.

Here’s are some deductions that can affect net pay:

• Federal income tax withholdings: This rate varies based on the tax bracket of each employee, which is determined by income. The information an employee puts on their W-4 and extra withholdings they opt for can affect the total tax amount.
• State income tax withholdings: Not all states levy income taxes, but you’ll need to withhold the appropriate amount if your state does.
• FICA payroll taxes: Every employee has to pay FICA taxes, which include Social Security at 6.2% of gross pay and Medicare at 1.45%.
• Wage garnishments: Some of your employees may have mandatory garnishments for unpaid taxes, past child support or delinquent debt. The government alerts you if an employee has a wage garnishment and tells you how much to withhold.
• Health insurance premiums: Employees who participate in your company health insurance plan have the premiums deducted from their paycheck. This is a pretax deduction.
• Optional insurance premiums: If you offer additional insurance options, such as dental, life and vision, these premiums also come out of an employee’s paycheck.
• Retirement savings contributions: Most retirement account contributions come out of a paycheck before taxes. Employees can choose the amount they want deducted up to the limits set by various retirement plans. Some employers match these contributions, which is an extra expense beyond the employee’s salary.
• Job expenses: Certain job-related expenses may be deducted directly from an employee’s paycheck. These can include union dues and uniforms.
• Flexible spending account: Employees can set up FSAs and make pretax contributions. The money can be used for health care expenses or to pay for childcare.

Impact of gross pay for employers

What is gross pay in terms of your responsibility? Gross pay is the amount you pay your employees, even though they don’t receive the full amount. Keeping in mind the difference in gross vs. net pay can help you set employee salaries. It helps you understand how much you pay compared to how much the employee receives to balance the two.

Gross pay also impacts how much you pay for FICA taxes for your employees. Each employee pays 7.65% of their gross pay in FICA taxes. As their employer, you match that amount. However, your portion doesn’t come out of the employee’s salary. You’ll pay 7.65% of the gross salary for each of your employees, which is an extra expense beyond the salary you pay.

Knowing the gross pay of your employees is necessary to calculate your FICA tax responsibilities. For example, if an employee earns a $100,000 salary, you’ll pay $7,650 per year in FICA taxes for that employee on top of their salary.