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- Gross wages are the total pay an employee receives before deductions during a pay period.
- Gross wages differ from net wages in that the latter describes gross wages after deductions are taken.
- Gross wage calculations vary for salaried and hourly employees; for hourly employees, overtime pay calculations are important.
- This article is for small business owners looking to calculate and streamline their employees’ gross wages.
According to PolicyAdvice, the average American yearly real wage in 2019 was $65,836. This fact raises an obvious question: What is a real wage? Is it a gross wage, or is it a net wage? Presumably it means a net wage, but either way, you can’t determine net wages without first knowing how to calculate gross wages. We’ll walk you through the process below and explain how certain software programs can help.
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What are gross wages?
Gross wages are the amount of pay an employee earns before any deductions, such as taxes or retirement account contributions, are taken. For example, if your chief of finance earns a salary of $100,000, their annual gross wages are $100,000. Similarly, an hourly employee who typically earns $800 per week before deductions has weekly gross wages of $800. Gross wages are vital for properly calculating an employee’s payroll taxes.
The difference between gross and net wages
In discussions about payroll and wages, you’ll often hear the similar-sounding terms “gross wages” and “net wages.” Net wages are the employee’s gross wages after deductions are taken. It’s the amount employees see on their pay stubs after federal, local and state income taxes, as well as benefit premiums or contributions, are subtracted. That’s why you’ll also see net wages referred to as take-home pay.
What is included in gross wages?
Gross wages include different types of pay based on whether an employee is hourly or salaried. For salaried employees, bonuses and expense reimbursements count as gross wages.
For hourly employees, gross wages include all the above plus, optionally, travel time, training, on-call hours and breaks. These extra inclusions are at the employer’s discretion. On the other hand, you must include overtime pay in hourly employees’ gross wages.
For both salaried and hourly workers, gross wages should include tips and commissions. If piece-rate pay pertains to your work, it should be part of gross wages as well. Gross wages should also include all compensation for time off (vacation pay, holiday pay or paid sick leave). Note that sick leave laws vary by state, so make sure you understand the requirements.
How to calculate gross wages
To fully explain how to calculate gross wages, let’s pretend you process payroll by hand. (Chances are you automate your payroll, but let’s ignore that for now.)
Simple math should get you where you need to go. Below, we’ll look at some numerical examples for hourly and salaried employees.
How to calculate gross wages for hourly employees
To calculate an hourly employee’s gross wages, take the following steps:
- Ensure you’ve correctly recorded the employee’s hourly wage. Let’s say you’ve recently bumped an employee’s hourly wage from $20 to $22. Whether due to poor memory or force of habit, it’s easier than you think to accidentally continue using $20 in your wage calculations. Check your payroll records to confirm wages before starting your calculations.
- Determine how many hours the employee worked during the pay period. Since hourly workers are often paid weekly, we’ll assume a weekly pay period for this example. Pull up your time and attendance records for the week to see whether the employee worked their usual hours or a different amount.
- Include breaks, paid time off and other applicable non-work hours. Let’s say you pay the employee during their half-hour lunch breaks, and the employee also took a full eight-hour paid sick day this week. In that case, don’t exclude these hours from the employee’s total hours worked. If you don’t pay for breaks or sick leave, however, you will exclude these hours.
- Multiply the employee’s total work hours by their hourly wage. If the employee worked 40 hours during the week in question, their gross wages are 40 hours x $22 = $880.
- Add overtime pay. Gross overtime wages require a separate calculation. We’ll explain this step in more detail later.
Another example may prove helpful here. Let’s say you’re calculating gross wages for an hourly employee who worked 30 hours this week. During the week, this employee also took five half-hour unpaid lunch breaks and underwent unpaid training for three hours. Additionally, the employee made sales with a total commission of $500 this week and earns $30 per hour. In this case, these are the employee’s gross wages for the week:
Hours worked x Hourly wage + Commission = Gross wages
30 x $30 + $500 = $1,400
As you’ll see, the employee’s unpaid breaks and training are not included in these calculations. If you were to pay for breaks and training, you’d multiply the total time spent on each by the employee’s hourly wage.
How to calculate gross wages for salaried employees
You’ll automatically know the annual gross wages of your salaried employees – it’s the same amount as their salary. However, for payroll tax calculations, annual gross wages aren’t so helpful. Instead, you’ll need to determine how much of the employee’s gross wages they earned during the pay period in question. Here’s how to do it:
- Verify the employee’s salary. The more employees you have, the easier it is to switch two employees’ salaries accidentally. Check your payroll records to confirm the employee’s salary before proceeding.
- Figure out how many pay periods you go through per year. There are 26 biweekly pay periods in a year and 24 bimonthly pay periods per year. Likewise, there are 12 monthly pay periods and 52 weekly pay periods per year. Record the number corresponding to your pay frequency.
- Divide the employee’s salary by your pay period frequency. For example, let’s look at an employee who earns $60,000 per year and is paid bimonthly. This employee’s gross wage per pay period is $60,000 ÷ 24 = $2,500.
- Add bonuses, commissions, and expense reimbursements. Continuing from the above example, let’s say the employee in question has also earned a $1,000 bonus and spent $500 on reimbursable business expenses. In that case, you’ll need to add $1,500 to the employee’s gross wages for the pay period, resulting in a $4,000 total before deductions.
Another example should prove helpful here. Let’s say your business partner earns a salary of $120,000 per year, paid monthly. Let’s also say that this month, your partner has brought in enough sales to yield a $10,000 commission. In that case, their gross wages for the month are as follows:
Salary ÷ Pay period frequency + Commission, bonuses, and expenses = Gross wages
$120,000 ÷ 12 + $10,000 = $20,000
This calculation is easy. However, salaries and commissions aren’t always numbers that end in a bunch of zeroes. Calculations with more complex numbers can quickly become complicated. Plus, you might have many employees for whom to calculate gross wages, making the whole thing tedious. That’s where payroll software comes in.
How to calculate gross wages using payroll software
To calculate gross wages using payroll software, you barely need to do anything. Some platforms, such as Gusto, automatically calculate your payroll. (Read our Gusto payroll review for more information.) Other platforms, such as Rippling, require just a few clicks, so they’re almost as convenient as fully automated payroll. (Read our Rippling review for more information.)
In any case, once your employees have entered their Form W-4 information and you’ve entered their wages, processing payroll should be straightforward.
How gross wages and overtime work
Special considerations go into calculating gross wages for hourly employees. Presumably, these employees are nonexempt from the Fair Labor and Standards Act (FLSA), which governs overtime. In that case, you’ll need to pay these employees at least time-and-a-half for all hours over 40 that they worked during a workweek.
We’ll use an example to explain how this arrangement works. If an employee earns $20 per hour but works 45 hours during a workweek, they’ve worked five hours over 40. As such, you must pay overtime wages for five of the hours worked. This employee’s time-and-a-half wage would be $20 x 1.5 = $30. Given this overtime rate and the employee’s standard wages, here’s how you would calculate their gross wage for the pay period:
Hourly wage x Hours worked + Overtime wages x Overtime hours worked = Gross wages
$20 x 40 + $30 x 5 = $950
Different states have different rules on what counts as overtime. For example, some states count any hours worked over eight in a workday as overtime. Under this definition, an employee who works 40 hours during a workweek but nine hours on one workday would earn overtime. Specifically, this employee would earn one hour of overtime pay and 39 hours of standard pay.
Consult your local and state laws to determine your overtime requirements, and don’t be afraid to ask a lawyer for extra assistance. When dealing with employee pay, you’re better safe than sorry.
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