Gross Pay

Gross pay is the full amount an employer pays an employee for a pay period before a single deduction. It is the sum of everything earned for that period from that job: regular wages or salary, overtime, bonuses, commissions, shift differentials, and reported tips. Income tax withholding, Social Security and Medicare tax, retirement contributions, and insurance premiums are all subtracted from gross pay to arrive at the money actually deposited, which is net pay.

How gross pay is figured depends on how the job is paid. An hourly employee's gross pay is the hourly rate multiplied by hours worked, with hours beyond 40 in a workweek generally paid at one and a half times the regular rate under the Fair Labor Standards Act. A salaried employee's gross pay for a period is the annual salary divided by the number of pay periods in the year: a $78,000 salary paid semi-monthly (24 periods) produces $3,250 of gross pay per check, because 78,000 divided by 24 is 3,250.

Gross pay is the base that almost every payroll figure is built on, but it is not the base for every deduction in the same way, which is where paychecks surprise people. A traditional 401(k) contribution lowers the wages subject to income tax withholding but not the wages subject to Social Security and Medicare tax. A pre-tax health premium paid through a Section 125 cafeteria plan lowers both. So two workers with identical gross pay and identical total deductions can have different tax withheld, depending on which deductions are pre-tax and for which taxes. The full step-by-step path from gross pay down to net pay, and the document that lays it out line by line, belong to the pay stub.

Gross pay is assembled first, and everything else on the paycheck follows from it.

1. Add up the period's earnings. For hourly work, multiply regular hours by the rate and overtime hours by the overtime rate; add any bonuses, commissions, or tips.

2. That total is gross pay. Withholding and deductions are calculated against it, not against a smaller figure.

3. Subtract taxes and deductions to reach net pay, the amount deposited.

A hypothetical example. Priya is paid $22 an hour on a weekly schedule and works 45 hours in one week. Her first 40 hours are straight time: 40 times $22 is $880. The 5 hours over 40 are overtime at one and a half times her rate, or $33 an hour: 5 times $33 is $165. Her gross pay for the week is $880 plus $165, or $1,045. If she also earned a $100 attendance bonus that week, it is added on top, so gross pay is $1,145. Her income tax withholding, Social Security and Medicare tax, health premium, and 401(k) contribution are then all figured from that $1,145.