Gross Pay
Gross pay is the total pay an employee receives before their employer withholds deductions, benefits, and taxes. Gross pay is sometimes referred to as gross income or gross amount. Conversely, net pay is the amount of money an employee takes home after withholdings and deductions. (Gross pay – Deductions = Net Pay)
Most of an employee’s gross pay is made up of their gross pay. Any of these types of earnings can constitute gross pay:
- Salary
- Shift-differential pay
- Hourly wages
- Tips
- Overtime pay
- Commissions
- Vacation pay
- Sick leave pay
- Holiday pay
- Bonuses
- PTO
Employers typically calculate gross pay for salaried or hourly workers on a daily, weekly, monthly, or quarterly basis. However, employers are allowed to calculate gross pay for any other time period.
Gross pay differs from base salary. Essentially, gross pay is an employee’s base salary plus any bonuses or additional earnings.
Gross Pay Example
An employee named Sarah works as a full-time graphic designer. During the year, she earns an annual salary of $60,000, a $5,000 performance bonus, and $3,000 in overtime pay. Sarah’s gross pay for the year is $68,000. This amount is the total of her base salary, overtime pay, and bonus.
The $68,000 represents Sarah’s earnings before deductions, including taxes, Social Security contributions, and health insurance premiums. Sarah’s employer uses her gross pay to calculate withholdings, including taxes. The amount left is SArah’s net income, or “take-home” pay.
Related Terms
Federal Taxable Income
is income withheld from an employee’s paycheck that is not subject to taxation. Some paycheck stubs show two numbers for gross income: federal taxable income and gross income. In most cases, federal taxable income is the lower amount. Examples of pre-tax deductions include 401(k) contributions, health insurance premiums, flexible spending accounts (FSA), and health savings accounts (HSA).
Base Pay
is the fixed standard rate of pay an employer and an employee agreed upon during the hiring process. This is the amount an employer is required to pay. Base pay may sometimes be referred to as annual salary, monthly income, or hourly rate.
Net Pay
is the “take-home” pay or net income an employee receives after all taxes, withholdings, and deductions are deducted from their paycheck.
Deductions
on a paycheck stub are amounts of money subtracted from an employee’s gross pay. A deduction can be either voluntary or mandatory. Tax deductions include Social Security tax and Medicare tax, along with local, state, and federal income taxes required by law. Other common deductions include retirement contributions, health insurance premiums, wage garnishments, union dues, and other benefits.
Withholdings
are portions of an employee’s earnings that are deducted from their paycheck. Withholdings minimize the tax amount employees must pay when they file their annual income tax returns.
Taxable Income
is the part of an employee’s income that is subject to taxation. Taxable income includes salaries, wages, bonuses, dividends, interest, rental income, capital gains, and other types of earnings.
Taxable Wage Base
refers to the portion of an employee’s income used by the Internal Revenue Service (IRS) to calculate their tax liability for Social Security. In some cases, an employee’s taxable wage base is the same as the portion of their gross income that is subject to tax. The difference is that the taxable wage base is the amount used to calculate Social Security taxes, while gross income is the amount from which all deductions are made.