What are gross wages, and why do they matter?

photo of a pay stub which includes the payroll term 'gross pay' on it

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One of the many ways to quantify income is by gross wages. This post will explain how gross wages work and help you figure out the best way of calculating them.

What are gross wages?

When people use the term “gross” while discussing finances, they are referring to an overall total. Therefore, gross wages are the total amount of wages an employer pays to their employee. They include the amount that may ultimately be withheld for taxes or other deductions. Typically, when you look at a paycheck, the gross pay will be the highest number on the paycheck.

It is quite rare for an employee to take home the amount they make in gross wages. However, when people are discussing the salary for a job, gross pay is usually what they reference. For example, if a business posts a job listing that will pay $60,000 per year, this number is the gross pay.

How Gross Wages Differ From Other Types of Wages

There are all sorts of terms that get thrown around when people are discussing wages. Ultimately, it can be quite easy to get all these phrases confused. To better understand what gross wages are, it is helpful to see how they are different from other types of wages.

Net Wages

Net pay is the other term people bring up a lot when discussing wages. The net wages are the amount of pay an employee actually takes home. Net pay is almost always lower than gross pay. This is because net pay generally includes many types of deductions.

Depending on where you live, there may be legal requirements for an employer to deduct taxes for social security, disability pay or other reasons. Other deductions from gross pay include things like payments for health savings accounts, retirement plans or other savings plans for employees. You remove all of these taxes and other deductions from the gross pay before an employee gets the rest as net wages.

W-2 Wages

Gross pay is not the same as the total wages you see on an employee’s W-2 either. The total wages shown on a W-2 are just the total taxable wages. Whether or not this number is the same as gross wages will depend on what deductions an employee took. Some optional deductions, for things like retirement plans, reduce the amount of taxable wages a person has.

FICA Wages

A final difference to explore is the difference between gross pay and FICA wages. The FICA taxes go toward Medicare and Social Security. The types of taxable wages vary a little. Social Security wages have a taxable wage base limit, while Medicare taxes do not have wage base limits. Ultimately, this can lead to slightly different numbers showing up for taxable income on FICA taxes. Your total FICA taxable wages can be the same or slightly lower than your gross pay.

How to Calculate Gross Wages

There are a few different ways of calculating gross pay. The correct method depends on whether an employee is being paid an hourly or salary wage. You can calculate gross wages on all types of pay periods, ranging from weekly to yearly.

Gross Wages for Salary Workers

For salary workers, gross wages are their annual salary. So, for example, if salaried employees get $50,000 a year, that is their gross annual wages. To find their gross earnings for other time periods, all they would have to do is divide their main salary by the number of periods in the working year.

  • Monthly: Divide by 12
  • Quarterly: Divide by 4
  • Biweekly: Divide by 26
  • Weekly: Divide by 52

Gross Wages for Hourly Employees

Things get a little more complicated when you calculate gross pay for hourly workers. You need to look at how many hours the employee has worked in a set amount of time. Then you can multiply this number by how much the employers pay for hourly work. Take an employee who has a pay rate of $10 and worked 60 hours in the past two weeks. You can calculate their biweekly gross pay by multiplying 60 times 10 to get $600.

Hourly workers often get paid overtime or receive special holiday pay. Typically, any time an employee worked more than 40 hours per week, they get paid 1.5 times as much for this extra work. So if an employee making $10 an hour works 50 hours in a week, you would calculate their regular hourly wages for 40 hours. Then, to this $400, you would add $75 for the five hours of overtime pay, resulting in a gross pay of $475.

The Importance of Understanding Gross Wages

Why do you need to know gross wages? There are several important uses for this calculation. First of all, knowing a company’s total gross wages helps employers figure out budgeting concerns. They are also helpful because they assist with determining tax deductions. For both employee and business taxes, they are the starting point for all deductions and tax payments. Being aware of these details can make it easier for people to plan for the future and make smart financial decisions.

How to Make Managing Gross Wages Easy

It may sound like a fairly simple concept, but as you can tell, it gets a lot more complicated when you’re managing a lot of employees. The last thing you want to do is waste a lot of precious time calculating gross wages by hand or saving all your payment data in bulky spreadsheets.

TimeForge makes it simple to handle employee payroll. Our software can seamlessly integrate with your payroll software of choice. This makes it easy to manage pay rates, attendance logs, time off and other essential things from one centralized platform. Ready to get convenient labor management solutions? Contact us now to learn more about our services.

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