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What is Gross Pay - Definitions, Examples, and Samples

First LEARN. Then remove the ‘L’. – Anonymous

The world today revolves around services and the compensation of those services. In a generation-long after the barter system, money is the preferred mode of payment value. With cryptocurrency still in its initial stages, the preferred legal tender for service or product remuneration still remains the note with Benjamin Franklin on it. Money talks, right?

If you are dabbling in the field of commerce or accounts or working in human resources management, you already know what does gross pay mean, how to calculate net pay from gross pay, and the basic difference between both. If you have been in a fix about knowing the details of your gross and net pay, or are in the dark about the concepts, the next couple of minutes can get you out of tough situations in a technical interview, depending on your job role.

What is gross pay?

If you want to know what is gross salary, it is nothing but the total remuneration you get for working with an organization. It can be an hourly wage structure or a salary (monthly, weekly), and is calculated without any tax or any other deduction like Medicare, insurance, EMIs for loans and purchases, and any other activity which is not directly profitable for the individual. Gross salary is also referred to as CTC (cost to company), which denotes the total amount of money the company is paying you annually for your services.

You can take online interview practice to negotiate better on your gross salary.

An example does a world of good in understanding concepts. 

The following example will be an effort to make the concept of gross pay crystal clear to you.

John is working for Deloitte as a senior systems engineer. He earns $200,000 annually, excluding all deductions. Thus, his gross pay for the year is $200,000 USD.

Difference between gross pay & net pay

Do you remember Rachel Greene from the famous American sitcom FRIENDS? Yes, the adorable and spoilt girl who later on becomes a successful executive at Ralph Laurens. Can you recall what she exclaimed after getting her first paycheck from the coffee shop Central Perk?

“Who is this FICA? Why is he taking all my money?”

Although shown in a funny and friendly context, the truth is there are significant others who do not know what is the difference between gross pay and net pay, and what it entails. Gross pay is the total amount of salary or compensation you receive from the company in exchange for your services.

Net pay, on the other hand, is the amount which you can get your hands on after all the deductibles from the salary. This is your disposable income – in essence, it is at your disposal to be spent. The deductibles include FICA taxes, income tax withholdings, insurance and loan premiums, and others, which are all taken care of before your account is credited. 

It is all about taking it home and making it in life, is it not?

Deductions from gross pay

It is sometimes frustrating to see some other entities taking your hard-earned money away, but that’s how it works, because the government does things for you in return too, right? Paying the taxes dutifully, and on time, is all the government expects you to do. But on what grounds or heads is the tax cut from the salary or pay?

Before we get into the list of deductibles, you first need to have a basic understanding of the concept of the deductibles.

So, what are deductibles?

Deductions directly reduce the take-home pay of a salaried employee, thereby affecting his/her disposable income. Wondered why even high-salaried individuals are not always keen on making expenditures? They rather work on investing because of a higher return value and relaxation from taxes. 

There are 3 categories of deduction:

  1. Federal, state, or city Income Tax Withholdings
  2. Employee FICA Tax withholding
  3. Voluntary

While the first and second are mandatory, the third category is dependent on the voluntary or involuntary financial decisions on your part, which further dictates its taxability.

How to calculate gross pay

Work as if you were the one paying your salary. – David Young

When it comes to the question of what is gross pay, have you ever wondered what the sections are in which your salary or wage is being divided before coming into your pockets?

It is the sum total cash earned in all pay periods in a year, which also includes payment for overtime, in the form of cash or otherwise. However, your own gross income per year is the cumulative amount earned from all sources in a financial year. 

Probably, you are finding this hard to understand or calculate which is only common. But it is good for you if you know the basics, right? 

You can understand better with the next example:

Charles works at a school and teaches Mathematics, and is paid on a monthly basis. But he is in kind of a cash crunch now and working two jobs. He also works at the Dollar Store, and he admits the extra little bit of money is helping him out. So, let’s say Charles earns $72,000 a year at the school annually. He is working at the Dollar Store at an hourly basis at $20 an hour. He works for nearly 20 hours a week.

Now, his gross pay at the school = $72,000

Monthly gross pay at school = ($72,000/12) (Total salary/Total number of pay periods) = $6000

This is how gross pay is calculated if you are a salaried person at a single job. However, in the case of Charles,

Gross pay at the store weekly = $20 x 20hrs = $400

Monthly gross pay at the store = $400 x 4 = $1600

From this, you need to add both the incomes,

Monthly gross pay at school = $6000

Monthly gross pay at store = $1600

Total monthly gross pay = Monthly gross pay at school + Monthly gross pay at the store

= $6000 + $1600

= $7600

Gross pay for Hourly workers: Gross pay for hourly workers or wage workers is calculated on the basis of hours worked and the hourly pay. For example, if Ross is working at a restaurant at 15$ per hour for 20hrs a week, his weekly gross pay for the week will be 20x15$.

Gross pay for Salary workers: Gross pay for salaried workers is divided into various pay periods. The pay period is decided beforehand and can be changed after the approval of the management. Gross pay is the total amount the company is paying the person as compensation for his/her services in the company.

In fact, there are a number of schemes in which hourly workers can be paid. They are:

  • Weekly (52 pay periods)
  • Bi-weekly (26 pay periods)
  • Semi-monthly (24 pay periods)
  • Monthly (12 pay periods)

You can narrow it down to three basic steps calculating your gross pay:

  1. Total income from a salaried job, including overtime, unpaid leaves, reimbursements and logging hours
  2. Figuring out the total number of pay periods
  3. Divide it by the total number of pay periods you are trying to calculate the gross pay for.

How to calculate net pay

Kim, married and living with her husband, works at a software development company as an Android developer. Her CTC is $240,000. She gets paid in 12 pay periods, which makes each of her pay periods worth $20000 per month. But that is her gross pay. What does she exactly get to take home?

Net pay has already been explained previously here. So, just for a recap, net pay is the amount of money that you take home. It is calculated after deductions of:

Federal income tax withholding: The employees need to fill the Form W-4, without which federal taxes are withheld. Employees need to submit this form once per pay period. The form is updated as of January 2020, and anybody planning to change their withholding, or new employees after this date, needs to fill the updated form.

Kim falls in the 24% bracket of Federal taxes.

This makes Kim’s income tax per year as 24% of $240,000 = $57600

Her tax deduction per pay period= $57600/12 = $120

State and local withholding: State and local withholding are done on the basis of the rules of the respective land. Various states have different rules and regulations for payroll withholding. If you need to look up a particular chart for a state, the Bureau of Labor Statistics can always help you with that, should you need to modify your state withholding.

FICA: FICA stands for Federal Insurance Contributions Act and mandates the taxes applicable to the employee salaries and wages.

The employers are also required to give FICA for the employees, equal as the employees are paying. The contributions acquired in FICA directly support the Medicare and Social Security programs of the USA.

If you are a self-employed person, you need to pay a tax which is termed as SECA – Self-Employed Contributions Act, an equivalent of FICA. The FICA taxes are deducted on the following basis:

  1. Social Security: 6.2%
  2. Medicare: 1.45%

From this, we can calculate the FICA taxes Kim pays monthly.

Social security = 6.2% of 20,000 = $1240

Medicare = 1.45% of 20,000 = $290

Total FICA tax: $1240 + $290 = $1530

Additional deductions: This is where health care and other premiums, including charitable causes which you are donating for, are calculated and deducted. 

So, what is Kim’s net pay?

Kim’s net pay = gross pay – (Federal income tax + state withholding and local withholding + FICA) = $20,000 – $120 – $1530

= $18350

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Why is it necessary to communicate both gross and net pay to employees and job candidates?

It is required by law to communicate to the employees about the tax deductibles which will affect his/her paycheck. The employer, on the other hand, needs to make sure everything is updated in the payroll. Because if not, he/she can be sued and fined, or worse, can go out of business if found guilty of not complying with taxation policies of the region of business operations. As an employee, all you need to do is be aware of the deductions on your paycheck and ask the management for a detailed payslip if they do not provide you with one.

You can guess something is fishy if there is an irregularity in pay slips. If your employer is asking to help you fill the Form W-4, it is again a tell-tale sign of discrepancy. Do not forget to get it clarified immediately.

Where to record gross and net pay:

While putting the numbers of the paycheck, a number of things are considered before, and it answers the questions of what is gross payroll. 

They are enunciated below:

  • The wage expense
  • Paid to employee
  • Taxes paid to the various governments, depending on the business

The payroll journal entry for an employee for the company is the gross wage or salary paid by the company. However, the deductibles are then calculated before the employee can take the paycheck home.

All the taxes cut from your gross pay will be mentioned on your pay slip provided by the company upon the issuance of the paycheck.

Some samples to help you understand the taxes

Example 1:

Samuel earns $18 by the hour, for 20 hours a week. The joint pays employees every week, which amounts to 52 periods. For him to calculate his gross pay, Samuel multiplies the total number of hours worked by the amount earned by the hour - $18. But he also needs some extra cash of around $240. So, how much more does he need to work and what is his gross pay?

240/18= 13hrs = number of extra hours Samuel has to put in for the extra $240.

Samuel, thus, earns a gross pay of $360 from hourly wages. He adds the overtime pay, $240, to his gross pay from wages:

$360+$240=$600

Samuel earns $600 for the said tenure.

TRIVIA

Although money makes a major call, the workplace environment also plays a key role in job satisfaction. Some signs of you jumping in the right ship are:

  1. Positive values
  2. Relaxed and encouraging atmosphere
  3. Cooperative
  4. Humorous
  5. Emphasizes employee and family health and environment

Example 2:

Gina is working hard for the last couple of weeks to save up for a trip she is waiting to go eagerly. She was earning nearly $15 an hour and was working nearly 30hrs weeks. She was paid bi-weekly, but to her dismay, she falls sick on the last two days before the paycheck. Her plan is nearly falling apart. How much did she lose?

Gina’s gross income every week = 30 x $15 = $450

Bi-weekly gross pay = $900

Daily gross pay = 6hrs a day, 15$ per hour = $15x6 = $90

Deducted gross pay = $90x2 = $180

Example 3:

Tony works as an accountant, and his gross salary is $360,000 a year. He is married and living with his two kids. They cannot be any happier, receiving the salary monthly, in a total of 12 pay periods. Tony has no other premiums to pay currently and cleared all withholdings as well. What is his annual net salary?

Tony’s Gross annual income = $360000

Annual Federal tax = 32% of $360,000

= $115,200

FICA = $22320+5220 = $27,540

Voluntary tax = NA

Net annual pay for Tony = $360000 – (115,200+27,540)

= $360000-142720

=$217,260.

Example 4:

Harry works as a customer service officer and earns around $52,000 annually. He gets paid on a bi-weekly basis. How can we find the number of pay periods and what is his weekly gross pay?

Harry’s gross income = $52,000

Number pay periods = 52/2 = 26 pay periods (since he receives his paycheck bi-weekly, and there are 52 weeks in a calendar year)

Now, to find the gross weekly pay, we first need to find the bi-weekly gross pay.

$52,000/26 = $2000

From this, we can easily find out the weekly gross pay of Harry.

$2000/2 = 1000

Example 5:

Jonathan works in a content development company and earns nearly $180,000 annually, as his gross pay, paid over 12 pay periods. He is married and living with his wife currently. After his marriage, he took an interest in charity and decided to donate $10,000 and decides to chalk out his next event in the coming year, as this is such a success. What will be now his monthly take-home pay? And what is the amount which he needs to pay his taxes on now?

Gross pay of Jonathan = $180,000

Voluntary deduction = $10,000

Gross on which federal tax will be calculated = $180000-10000=$170,000

Federal tax = 22% of $170000

= $37400

FICA (always calculated on the gross pay) = $13,770)

Net pay = $180000 - $13,770 - $10,000

= $156,230

So, the total amount Jonathan is taking home after all the deductions is $156,230.

These examples show the variations in taxation depending on job type, marital status, living status, and voluntary deductions in the form of charity or other. 

One of the most crucial things you need to remember is that the meaning of gross income is not only limited to cash income, but also other forms like realty, reimbursements, or any other payment in any form which can be directly used to obtain the cash.

Essentially remembering the entities you are paying to and paying for is just for your own safety and information purposes. Not knowing where your hard-earned money is going is only natural to raise a few eyebrows. 

The best career advice would be to remain in the loop about what is net pay and gross pay and stay updated about the changes in rules and regulations. 

In fact, you might be asked these questions in technical interviews as well. Hence, it would really help if you opt for technical interview and mock interview sessions.