What Is The Employee’s Gross Pay?
When it comes to understanding paychecks, it is very easy to get muddled up with all the numbers and deductions that appear on that little slip of paper. Our check stub maker allows you to generate these with ease and saves a lot of unnecessary hassle for the payroll department.
Whether you are an employer who writes their payslips manually or an individual who has just received their first paycheck, gross pay can be an elusive subject when it comes to talking about finance and not everyone understands how it works.
If you are wondering what ‘gross pay’ is and why it is not the amount of money that is deposited into an employee’s account, then have no worries. We have completed a detailed look into what gross pay is, what is deducted from it and how it is different from other financial terms like net pay and gross income.
Also read: Payroll Codes
What Is Gross Pay?
When it comes to writing up your employee’s paychecks, it is important to include their gross pay.
Gross pay refers to the amount of money used to calculate the wages or salary of an employee. If your employees are salaried, their gross pay is used to calculate their salary. If your employees work hourly, then you use their gross pay to calculate their wage. It includes all the money an employee has earned during that period of time but prior to removing taxes or any other deductions.
In summary, it is the total amount of money earned by your employee before you make payroll deductions.
Gross pay includes a lot of various components, such as wages and salaries, bonuses, sick pay, and vacation pay. These are all added together and then included on an employee’s paycheck so they can see the total amount they earned during a set period of time.
However, the gross pay is not what always appears in an employee’s account.
Taxes and other payroll deductions will appear on the paycheck so the employee can see how much they have had deducted from their gross pay, and see how much of their earnings they will receive into their bank account.
Also read: Mandatory Deductions From Your Paycheck
How To Work Out An Employee’s Gross Pay
Working out your employee’s gross pay is a pretty easy task.
For hourly employees, you will need to multiply the number of hours worked by the hourly pay rate. Do this for every pay period you are including in a single paycheck (this should usually be one paycheck per pay period).
You will need to use an attendance log to see how many hours the employee has worked and multiply that number by their hourly pay rate. Remember to include overtime hours in the gross pay.
For salaried employees, the process is even easier. Divide the total amount of yearly pay by the number of pay periods within a year. Pay periods may differ from business and business, so see how many times you pay your employee in one year and divide their annual salary by that number. This will show you how much they earn in one pay period.
What Gets Deducted From An Employee’s Gross Pay
An employee’s gross pay is not always the amount that goes straight into their bank account.
It is highly likely that when you are writing your employee’s paycheck, you will need to make deductions from their gross pay. Payroll deductions include taxes like income tax or social security tax, pension payments, or health insurance.
Most businesses use an automated payroll service provider so there is less room for human error during the payroll process, but some businesses still do their paychecks manually. If you write your employee’s paychecks manually, then you will need to check each employee’s individual Form W-4 Employee’s Withholding Certificate, state and local withholding certificates, and other details like their benefits such as health insurance or court-ordered garnishment. These documents will tell you all you need to know on what to deduct from an employee’s paycheck.
Gross Pay vs Net Pay
After the deductions to an employee’s gross pay is complete, then they are left with their net pay.
An employee’s net pay is the amount of money they get to take home. It is the amount deposited into the employee’s bank account and is free for them to spend whichever way they choose fit.
Of course, an individual may have other commitments to pay for separately, like other savings accounts but they can pay that themselves afterwards as this is something unrelated to your business that they have opted into.
To calculate an employee’s net pay, you will need to take their gross pay for that pay period, then deduct their pre-tax contributions like health insurance premiums or 401(k) savings account. Then, you withhold all the taxes and garnish wages for any court-ordered payments that may apply to an individual employee.
Then, you should be left with the net pay that you will include on their paycheck and deposit the amount into the employee’s account.
Gross Pay vs Gross Income
Some people may use gross pay and gross income interchangeably but the truth is there is a difference between the two terms.
As we have mentioned above, gross pay refers to the total amount an employee has earned in one pay period. This gross pay appears on their paycheck and has deductions made to become their net pay.
Gross income, however, is the total amount of earnings an individual earns in one pay period. This includes other forms of income and does not appear on their paycheck. For example, an employee may earn $2,000 of gross pay from working at your business, but also earn $500 from dividends - this would make their gross income for that period $2,500.
Other than wages, an individual may earn more income through interest received, dividends, rental income, alimony, pensions, or even gross profit if they also run a business. All of this adds together to make an individual’s gross income.
Some of these count as taxable income, but it is down to the individual to declare it and report it as part of their income. As their employer, you will not be expected to add the other forms of an employee's income onto the paycheck you write.
So what is gross pay?
Gross pay is the total amount an employee earns in one pay period before taxes and other deductions are applied. Once these deductions are made, the employee is left with their net pay and a small feeling of resentment that they have had so much taken away from them.
It can be depressing when you look at your payslip and see the variance between your gross pay and your net pay, but taxes go towards a number of important things that help our society function - like education or emergency services.
After reductions are made, the employee has their net pay - the amount of money they actually get paid. Once they have received this, they are free to spend it in any way they like.
As an employer, it is important that you work out an employee’s gross pay as it helps them keep on track with their finances and also helps you keep on top of how much you are paying in wages every month. It is an important part of a paycheck that should not be overlooked.
Due to this, it may be worth either hiring a professional to complete the payroll process for you or hiring an automated payroll service provider to avoid any human errors in your payslips. This will take a great deal of stress off your mind so you and your employers can sit back and relax, knowing they have been paid their full wage and that their taxes are dealt with.
And so, that should be all your questions about gross pay are answered!