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Gross pay is the amount of wages or salary that is paid by an employer to an employee. The amount reflects the total amount of pay before any deductions of any type are withheld from the pay. Once the appropriate deductions are completed, the employer presents the remaining amount, known as net pay, to the employee.
To calculate gross pay for hourly employees, the employer will simply multiply the number of hours worked by the agreed upon hourly rate. In the event that the company operates in a country where laws governing overtime pay are involved, the formula will be adjusted to include any additional funds due the employee for hours worked above and beyond the norm. Once the gross payroll is calculated, the employer can move forward with applying any deductions associated with each employee account.
There are a number of different types of deductions that are subtracted from this total amount, the most common of which has to do with taxes. In most countries, employers will deduct national, state, and local taxes from the gross pay earned by each employee. A pay calculator is often used to determine how much must be withheld in terms of taxes for each applicable jurisdiction.
The deducted funds are forward to the appropriate tax agencies on behalf of the employee, who receives an itemized list of how much tax was withheld for each jurisdiction involved. The list appears on what is known as a pay or check stub, and makes it very easy for the employee to see how much was withheld and subsequently paid to each tax agency.
Along with taxes, health insurance costs may also be deducted. While some employers pay health coverage costs in full, others choose to split the cost with each employee that is enrolled in the plan. A percentage of the monthly premium is withheld by the employer and combined with the employer’s share for the group insurance coverage, then forwarded to the provider.
Other types of withholding may also apply. For example, the employee may opt to have a portion withheld and placed into a retirement or pension plan, or divert a portion of the funds directly into a savings account. In the event the employee has court ordered child support, that amount may also be withheld and sent to the court by the employer. The same is true with any court-ordered garnishments or liens that may have been placed on the employee by a creditor.
It is important to note that people who are classified as independent contractors receive gross pay from their clients. The contractor is responsible for paying taxes and any other obligations from the gross paycheck rather than the client.
What Is the Difference Between Gross Pay and Net Pay?
When you get a pay stub from your job, there are many different sections on it. In addition to your gross pay and net pay, there will be areas for tax deductions, including state, local, and social security. The difference between your gross pay and your net pay is how much you earned versus how much you actually took home.
Depending on your circumstances, you may also notice deductions for child support or other types of wage garnishments. While it's always a good idea to know where your money is going, for most people, the two most important parts of the paystub are the gross earnings and the net earnings.
Your gross pay is the amount of money that you earn before any deductions are taken out. When a job advertises that its employees make $50,000 per year, it is before any deductions. If you make $20 per hour and work 40 hours per week, you earn a gross pay of $800 per week. However, that is not how much you take home.
First, your employer will subtract any deductions. To determine what your employer deducts, you'll need to look at your paystub. Typically, it will have several sections.
- Identifying Information – The top of your paystub includes identifying information. You'll see your legal name, the last four digits of your social security number if you have one, your employee ID, a check number, the pay period for which the earnings are for, and the date you were paid.
- Income Section – This section shows your gross wages, the rate at which you are paid, how many hours you worked, and how many hours you've worked to date in the calendar year.
- Deductions Section – This portion of your paystub shows what amounts were subtracted from your gross pay. Everybody pays federal, local, and social security taxes, although the amounts vary depending on where you live and how much you earn. If you owe child support or have some type of wage garnishment, these deductions will be listed as well.
- Totals – The bottom section of your paystub provides totals for the entire calendar year. It will list how many hours you've worked, how much gross pay you've earned, how much you've had subtracted for deductions, and how much your net pay is for the calendar year so far.
Finally, the paystub will have a copy of your check attached. If you have direct deposit, the check will be a copy and specifically state the check is a voided copy. The amount you're paid after deductions will be prominent. For example, if you earn $800 a week in gross pay but pay 10% in taxes, 5% for social security, and 10% for child support, you'll be subtracting 25% of your check. This means your net pay, which is how much you actually take home, is $600 per week.
How To Calculate Gross Pay
Calculating your gross pay involves simple math. First, you'll need to know how many hours you worked during the pay period and how much you make per hour. For example, if you get paid every other week, you probably work 80 hours per pay period. If you make $20 per hour and work 80 hours per pay period, you'll multiple 20 by 80. This means you make $1,600 per pay period in gross pay.
If you worked overtime during your pay period, it gets a bit more complicated. Imagine you make time and a half for overtime pay and worked 20 hours of overtime on the pay period. This means you were paid $30 per hour for 20 of the hours you worked. That is an extra $600 in gross pay. If you worked 80 hours at regular pay and 20 hours at overtime pay, you earned a combined total of $2,200 ($1,600+$600) in the pay period for your gross pay.
Is Gross Pay Before or After Taxes?
Gross pay is the income you earn before you pay your taxes or pay for any other deductions. If you know what tax bracket you fall into, know how much your local tax rates are, and know how much you pay in other deductions per pay period, then you can often calculate your net pay (also known as your take-home pay) even before you receive your paycheck. For example, if you earned the aforementioned $2,200, but you know that you pay 15% toward taxes and $400 per pay period in child support, you can calculate your net pay. If you pay 15% of $2,200, you subtract $330, which takes you to $1,870. Next, subtract the child support payment. Subtracting $400 from $1,870 gives you $1,470, which is how much you would take home for the two-week pay period.