Gross wages sounds like a simple concept. It’s the amount of pay your employees earn. But what exactly is — and isn’t — included in gross wages, and why is it so important to calculate gross wages correctly? We’ll explain exactly what gross wages are, how to calculate them, and why understanding gross wages is critical to managing your small business.
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Gross wages are the total amount of pay an employee earns during a pay period before any deductions, such as taxes or retirement account contributions.
For example, a chief of finance earning a salary of $100,000 has annual gross wages of $100,000. With semi-monthly paychecks, this employee’s gross salary per pay period is $4,166.67 ($100,000 ÷ 24 pay periods per year).
An hourly employee who earns $20 per hour and works 40 hours in a week has gross wages of $800 for the week ($20 per hour x 40 hours).
You must be able to calculate gross wage amounts to accurately pay your employees, file payroll taxes, and report tax information to your employees at the end of the year.
Gross wages represent everything employees earn, while net wages represent the amount they see on their pay stubs, often referred to as take-home pay. The difference between gross and net wages is equal to the total deductions for federal, local and state income taxes; retirement contributions; automatic contributions; and other reductions in pay.
For example, say you have a full-time employee who earns $20 per hour in a location with no state income tax. Their gross pay, deductions and net pay are as follows:
|Gross pay (40 hours x $20 per hour)
|Federal income tax withholding, from tables
|FICA (Social Security and Medicare) tax withheld (7.65 percent)
|Union dues ($2 per hour x 40)
|Health insurance contributions
|Total deductions from pay
Gross Wages – Payroll Deductions = Net Wages
Gross wages include different types of pay based on whether an employee is hourly or salaried. For salaried employees, gross wages include salary, bonuses and any additional pay.
For hourly employees, gross wages include hourly pay, overtime pay, piece-rate pay, bonuses and any other earned pay. Gross wages may also include payment for travel time, training, on-call hours and breaks, depending on the labor laws in your location and your discretion.
For both salaried and hourly workers, gross wages include tips and commissions.
If you reimburse employees for expenses and use an accountable plan as described by the Internal Revenue Service, do not include expense reimbursements in wages. This is essential to avoid your employees having to pay tax on reimbursements. [See our guide to mileage reimbursement laws and policies.]
If your employees work overtime, make sure you understand federal overtime rules and pay them according to the regulations. Failure to do so may result in lawsuits, fines and possible criminal charges for repeated violations.
Gross wages only include the amounts your employees earn. You have many other expenses related to payroll that aren’t included in gross wages, such as the employer-paid portion of Social Security and Medicare taxes, the cost of employee benefits and employer contributions to retirement accounts. [View the best employee retirement plan providers.]
It’s crucial to know your total payroll cost as part of understanding and planning for your business.
>>Read next: Can SMBs Balance Payroll Burden and Labor Demand?
Below, we break down how to calculate gross wages with numerical examples for hourly and salaried employees.
Calculate an hourly employee’s gross wages by following these steps.
Another example may prove helpful. Let’s say you’re calculating gross wages for an hourly employee who worked 30 hours this week. The employee also took five half-hour unpaid lunch breaks not included in the 30 hours worked and attended unpaid training for three hours. Additionally, the employee earned commissions of $500 this week and earns $30 per hour for their base rate. The gross wages are calculated as follows:
(Hours worked x Hourly wage) + Commission = Gross wages
Hourly wages (30 x $30 per hour) $900
Total Gross Wages $1,400
To calculate gross wages and report payroll tax correctly for salaried employees, you need to determine gross wages for the pay period. Here’s how:
Calculating gross wages for one or two employees is usually straightforward. If you have many employees, however, calculating gross wages accurately can become more complicated. If you make a mistake, employees may be paid more or less than they should be, or their tax information may be incorrect. To simplify payroll calculations and reporting, consider using payroll software, which we dive into below.
Some payroll platforms, such as Gusto, automatically calculate your payroll, including gross wages. (Check out our Gusto payroll review for details.) Other platforms, such as Rippling, require just a few clicks and are almost as convenient as fully automated payroll. (Read our Rippling HR software review for more information.)
Whatever payroll service you use, processing payroll should be simple once your employees enter their Form W-4 information and you enter their wages.
To discover how the leading payroll services can benefit small businesses like yours, visit our overview of the best payroll software. You’ll learn the ins and outs of payroll software while seeing our top recommendations based on your business’s size, payroll complexity and more.
Special considerations go into calculating gross wages for hourly employees who work overtime hours. Hourly employees are generally nonexempt from the Fair Labor and Standards Act (FLSA), which governs overtime. This means you must pay them at least time-and-a-half for all hours over 40 they worked during a workweek.
For example, say an employee earns $20 per hour and works 45 hours during a workweek. They’ve worked five hours over 40. As such, you must pay overtime wages for those hours. The employee’s time-and-a-half wage would be $20 x 1.5 = $30. Given this overtime rate and the employee’s standard rate, here’s how you would calculate their gross wages for the pay period:
Total Gross Wages
States overtime rules vary. For example, some states count any number of hours worked over eight in one workday as overtime. Under this definition, an employee who worked 40 hours during a workweek, but nine of the hours were on one workday, would qualify for overtime pay. The employee would earn one hour at the overtime rate and 39 hours at their standard rate.
Consult your local and state laws to determine your overtime requirements and get professional legal advice if you still have questions. When dealing with regulations regarding employee pay, you’re better safe than sorry.
Two in three business owners aren’t paying themselves due to inflation.
Whether you use payroll software or do the calculations yourself, understanding gross wages helps you pay your employees correctly, report payroll taxes accurately, and stay on the right side of labor and tax laws. You also need to calculate your gross payroll and total payroll costs as part of your cost of goods sold and overhead costs. The more you know about your company’s gross wages and payroll costs, and changing trends in those costs, the more effectively you can make sound decisions and financial plans for your small business.
Max Freedman contributed to this article.