There are many challenges involved in the payroll process. One challenge, for many companies, is the topic of gross wages. Let’s take a closer look at gross wages to see if we can clarify matters.
Let’s face it, everything begins with gross pay when running payroll. What attracts many individuals to a particular job are the gross wages. And without them, how would payroll calculate an employee’s taxes and deductions on their wages? Take-home pay would be difficult to determine without knowing how to properly calculate gross wages.
Gross Wages – What Are They?
Before you take out any deductions or withhold taxes, you have something called gross wages. Deductions are what significantly lessen the take-home pay of an employee. They are payroll withholdings, in essence. The gross pay of an employee can be calculated for various periods of time. Ordinarily, the gross pay of an employee is calculated for a pay period. But any period of time can be calculated as well (i.e., daily, monthly, quarterly, annually).
How Is Gross Pay Calculated?
This depends largely on whether an employee gets a salary or hourly wages. Let’s look at them individually:
- Salary Workers’ Gross Pay – To calculate gross pay here, you begin with an employee’s annual salary. That is divided by the number of periods in one year. For instance, to calculate gross wages monthly, you would divide the salary for one year by the 12 months of a year. Now let’s say that you have an employee who makes $45,000 annually. Let’s calculate their gross wages biweekly. In one year, there are 26 biweekly periods. So $45,000 will be divided by 26. What are the gross wages biweekly for that employee? The answer is $1730.77
- Hourly Workers’ Gross Pay – Gross wage calculation here is done through the multiplication of hourly wages by however many hours were worked within a period. For instance, if you had an employee who earned an hourly wage of $10 and you wanted to figure out what one work weeks’ worth of gross wages were, you would do the following: during the workweek, 40 hours were worked. So here, you have $10 times 40 hours which equals $400 in gross wages for that employee.
When overtime is involved, that is included in an hourly employee’s gross pay. Take the previously stated hourly employee situation. Now let’s say they worked five hours of overtime and they get time and a half for overtime. Take the $10 an hour that they make times one and a half. Multiply that by five and you will have a total of $475 in gross wages.
Why Do We Need Gross Income?
Gross pay is what an employee’s pay deductions are based on. This is needed so that payroll people can figure out deductions and calculate taxes for their employees.
- Pretax deductions – before you withhold taxes, these are deducted from gross pay. It could be a percentage of gross pay or it may be a fixed amount that will be taken out of each paycheck.
- Employee taxes – these are a percentage of the gross wages of an employee that are withheld after pretax deductions. Again, it may be a fixed amount rather than a percentage.
- Employer taxes – these are a percentage of an employee’s pay for which you will again use the gross wages of your employee with which to calculate.
- Post-tax deductions – after all the rest of the above, these are subtracted from the gross wages of your employee. And again they can be a percentage or a fixed amount.
Net Wages Versus Gross Wages
Before deductions, gross wages are what your employee earns. Net pay, or net wages, is what’s left after all the deductions are taken out. It is what appears on the paycheck and what the employee takes home. This equation is the easiest: gross wages – deductions = net wages.
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