Understanding Gross Salary: What Is It And How It Works?

Individual Tax Return

Understanding Gross Salary: What Is It And How It Works?

Gross salary is the term used to describe all of the money you’ve made while working at your job, figured before any deductions are taken for taxes, Social Security and health insurance. If you work more than one job, you’ll have a gross salary amount for each one. Creditors often look at your gross salary when determining whether or not they should extend you credit, and if they decide to do it, how much they’ll give you.

Whether you earn a salary or hourly wages, you may notice two different numbers on your paycheck. These two numbers are commonly referred to as “net pay” and “gross pay.” If you’re interested in understanding your pay as it relates to others in your field, visit this Salary Calculator for a free, personalized pay range based on your location, industry and experience.

The different words used to describe wages can be confusing. This article summarizes the difference between gross wages and net wages, and why understanding this difference is important.

Have you ever wondered why the word gross is used to describe wages as well as bad sushi? We certainly did. It turns out, the reason for this isn’t quite as fun as we’d initially hoped. In fact, the word “gross” actually has multiple meanings. Many often think of the most common meaning, the one found first in the dictionary which says: “Glaringly noticeable usually because of inexcusable badness or objectionableness.” (This is actually a pretty awesome definition and something we dare you to tell your spouse when you don’t like their cooking).

But there’s another definition of gross, and it’s this: “Consisting of an overall total, exclusive of deductions.” This is the meaning we’re going to focus on today.

Your gross income is the total income amount that you must report to the ATO. This amount includes all of your income from all sources, such as the total of your combined salaries if you held more than one job during the year, and any other income you may have from a trust fund, rental income, dividends or another source. The resulting amount is used as the basis for determining your income tax, and then you subtract all your allowable tax deductions to come up with your adjusted gross income, commonly called the AGI. This is the actual amount you have to pay taxes on and is the amount some creditors, such as the Department of Housing and Urban Development, use to determine your loan eligibility.

What Does Gross Salary Mean?

Gross salary is determined by the employer when the job is offered. This gross salary might come from different sources such as wage, commissions, tips, bonuses and any other economic incentive received as part of the wage, and it is the baseline for any calculation made regarding the employee’s income.

The gross salary doesn’t take into account deductions or taxes that are taken out after the payment is issued, because it is the pre-negotiated amount of money stipulated at the job contract. Later on, the gross salary will be reduced by these deductions, to comply with federal or state laws or also, to pay for any other financial commitments taken by the employee that is directly taken off its gross income.

The gross salary figure helps the employee compare its level of compensation with the market average to see if his salary is competitive and rewarding, concerning similar industry peers. On the other hand, gross salary serves as a measure to determine the employee’s payment capacity, to engage in any debt commitment.

The pay an employee receives before taxes and deductions are withheld known as gross wages. Because gross wages are calculated before deductions, the actual take-home pay of an employee may be significantly less than their gross wage. Gross wages are calculated differently depending on whether the employee works full-time or part-time, or whether the employee is salaried or hourly.

Gross wages include all of an employee’s pay before taxes, and other mandatory and discretionary deductions have been taken out. Gross wages include tips, salaries, hourly wages, overtime, vacation pay, piece-rate pay, commissions, bonuses, sick pay, and holiday pay. The majority of an employee’s gross wages typically consists of their base pay, such as their salary, hourly pay, or tips (for tip-based workers).

Employers can calculate gross wages on a quarterly, monthly, weekly, or daily basis—or for any other period of time they desire. Understanding your employee’s gross pay is important because gross wages are necessary for calculating the amount of taxes and deductions that must be withheld—especially if deductions are based on a percentage of the employee’s gross wages.

Gross income for an individual—also known as gross pay when it’s on a paycheck—is the individual’s total pay from his or her employer before taxes or other deductions. This includes income from all sources and is not limited to income received in cash; it also includes property or services received. Gross annual income is the amount of money a person earns in one year before taxes and includes income from all sources.

Understanding Gross Income

It is important to understand the difference between gross and net income. Your paycheck may show a lower take-home amount than what you expect from your salary or an hourly wage—knowing the difference between the two will help when planning your expenses.

Individual Gross Income

An individual’s gross income is used by lenders or landlords to determine whether the said individual is a worthy borrower or renter. When filing federal and state income taxes, gross income is the starting point before subtracting deductions to determine the amount of tax owed.

For individuals, the gross income metric used on the income tax return includes not just wages or salary but also other forms of income, such as tips, capital gains, rental payments, dividends, alimony, pension, and interest. After subtracting above-the-line tax deductions, the result is adjusted gross income (AGI).

Continuing down the tax form, below-the-line deductions are taken from AGI and result in a taxable income figure. After applying for any allowed deductions or exemptions, the resulting taxable income can be significantly less than an individual’s gross income.

 

Employee deductions and taxes are generally calculated based on an employee’s gross wages. For employers, knowing how to calculate gross wages correctly is important for calculating mandatory deductions—such as how much in taxes, Social Security, and Medicare, you need to withhold from an employee’s paycheck.

If employees are interested in viewing their gross pay for the year, they can find their gross wage as well as any deductions on their pay stub. Gross wages are usually the largest recorded number near the top of the pay stub.

 

Gross income is a person’s total income earned before taxes and other deductions. Earned income includes salaries, wages, bonuses, tips, and self-employment income.

There are income sources that are not included in gross income for tax purposes but may still be included when calculating gross income for a lender or creditor. Common nontaxable income sources are certain Social Security benefits, five life insurance payouts, some inheritances or gifts, and state or municipal bond interest.

Business Gross Income

A company’s gross income, or gross profit margin, is the most simple measure of the firm’s profitability. While the gross income metric includes the direct cost of producing or providing goods and services, it does not include other costs related to selling activities, administration, taxes, and other costs related to running the overall business.

How Do You Calculate Gross Wages?

How an employee’s gross wages are calculated depends on whether they are salaried or receive hourly pay. Hourly workers’ gross wages also depend on the number of hours worked.

Calculating Gross Pay for Hourly Workers

For hourly employees, gross wages can be calculated by multiplying the number of hours worked by the employee’s hourly wage. For example, an employee that works part-time at 25 hours per week and receives a wage of $12 per hour would have a gross weekly pay of $300 (25×12=300). A full-time hourly employee at 40 hours per week with the same hourly pay would receive a weekly gross wage of $480 (40×12=480).

If the employee accrues any overtime pay during the week, you must also calculate that as gross wages. In most Australian cities, overtime pay is calculated as time and a half, so if our full-time employee from above worked 5 overtime hours, their overtime pay would equal $90 (5x(12×1.5)). Their total amount of gross pay for the week would equal $570 (480+90=570).

There are states, however, that have more unique overtime calculations. Make sure to understand how all the states where your hourly workers are employed calculate overtime.

Calculating Gross Pay for Salaried Workers

Calculating the gross wage for salaried workers is a little different because you start with their annual salary. If you wanted to determine the gross wages per month, you would divide the employee’s annual salary by 12. For example, if the employee makes $55,000 per year and you want to calculate a monthly gross wage, you would divide the total salary by 12. This would equal out to a monthly gross wage of approximately $4,583.

Calculating gross wages for employees is a simple process that doesn’t require any complicated formulas or advanced math skills.

Cash Flow

What Is the Difference Between Net and Gross Salary?

The wage an employee is paid before taxes and deductions are their gross salary. Net salary is the pay an employee receives in their paycheck after taxes and deductions—or the pay they actually take home in their paycheck. To calculate the net pay of an employee, you must first calculate gross pay then subtract any deductions from gross pay to get the net wages of the employee (gross pay-deductions=net pay).

If you take the latter definition, you’ll begin to make sense of what gross wages or gross pay actually means. Gross wages are the total amount of money paid to an employee before deductions for things like taxes, health insurance, or other payroll withholdings.

Net pay is the amount of money the employee actually receives–meaning it’s the money that arrives in their bank account after payroll withholdings and deductions. Because of these deductions, an employee’s net pay will almost always be less than the employee’s gross pay.

Your gross pay will often appear as the highest number you see on your pay statement. It is a reflection of the amount your employer pays you based on your agreed-upon salary or an hourly wage. For example, if your employer agreed to pay you $15.00 per hour and you work for 30 hours during a pay period, your gross pay will be $450.00.

Net pay is the amount of money that will finally be available to you. Using our last example, if you earned $450.00 in gross pay, your net pay will be the amount that ends up in your bank account after taxes and other fees have been taken out.

In most cases, your net pay appears in a larger font on your paycheck or pay statement and is often bolded to appear darker so that you can easily distinguish it from your gross pay.

How Gross Pay Works?

For an hourly employee, let’s say an employee is paid $10 an hour, worked 43 hours in a workweek, and overtime pays $15 for all hours over 40. You would do the following steps:2

  • Calculate regular pay ($10 x 40 hours = $400)
  • Calculate overtime pay ($15 x 3 hours = $45)
  • Add them together

In this scenario, the employee’s gross pay would be $445 for the week. For a salaried employee with an annual salary of $50,000 who gets paid biweekly, divide $50,000 by 24 (the number of pay periods in a year) to get $2,083.33—the gross pay for each pay period.

Understanding the difference between gross pay and net pay is critical for both employers and employees. If you find yourself needing help with payroll, feel free to contact our team. Eddy builds payroll solutions that fit small business needs.

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