Gross Pay
Gross pay refers to the total amount of money an employee receives before any taxes and deductions are taken out. For salaried employees, gross pay is usually the annual salary divided by the number of pay periods in a year. For hourly workers, it’s the number of hours worked in a pay period multiplied by the hourly wage.
For example, if an employee works 40 hours in a week and earns $15 per hour, the gross pay for that week would be 40 hours x $15/hour = $600.
It’s called “gross” because it’s the total amount of compensation before other factors are considered. These other factors can include income tax, social security contributions, healthcare premiums, retirement contributions, or any other deductions which an employer is obligated to subtract from an employee’s pay.
The remainder after these deductions is referred to as the employee’s net pay or take-home pay, which is the actual amount of the paycheck an employee receives or the amount deposited into the employee’s bank account.
Example of Gross Pay
Suppose Jane works for a company and is paid on an hourly basis. She earns $20 per hour. In a particular week, Jane worked 35 hours. To calculate Jane’s gross pay for that week, you would multiply her hourly wage by the number of hours she worked:
Gross Pay = Hourly Wage x Hours Worked Gross Pay = $20/hour x 35 hours = $700
So, Jane’s gross pay for that week is $700. This is the total amount of money she earned before any deductions.
Now, let’s say Jane has the following deductions:
- Federal Income Tax: $100
- State Income Tax: $30
- Social Security Tax: $43.40
- Medicare Tax: $10.15
- Health Insurance Premium: $50
To find her net pay (or take-home pay), you would subtract all the deductions from the gross pay:
Net Pay = Gross Pay – All Deductions
Net Pay = $700 – ($100 + $30 + $43.40 + $10.15 + $50) = $466.45
So, Jane’s net pay for the week, or the amount she will actually receive in her paycheck, is $466.45.
