Gross Wages Meaning
Gross wages are the total amount of remuneration paid to employees, either hourly or monthly, before any deductions like taxes which include social security and Medicare, life insurance, pension contributions, bonuses, etc are made.
They are the total wages that an employer pays to the employee without deducting any charges or taxes. They can be stated in hourly, weekly, or annual rate but remain free of any deduction. Deductions are based on employment services and are subject to different federal and non-federal schemes.
How to Calculate Gross Wages?
The calculation of these wages varies from one employment to another. In general, these are calculated by considering any deductions related to taxes, insurance charges, overtime pay, Medicare, etc.
Another method is to multiply the hourly wage rate with the number of hours for which the employee was employed.
Follow these steps to calculate gross wages:
- Step 1: Calculate the number of hours an employee has worked; this can be taken from his attendance or timesheet that is with his employer.
- Step 2: Get the hourly pay rate of the employee; multiply this pay rate by the number of hours worked.
- Step 3: Include any over-time pay for that pay period and add it to the payment calculated above.
- Step 4: Also include any gross deductions, bonuses, and commissions, taking care of the next point, and relating it with every deduction in this calculation.
- Step 5: Remember not to include any pay or benefits in this calculation that are taxable to the employer. This can be known from the payroll accountingPayroll AccountingPayroll Accounting is the accounting function within a Company that involves management, recording, determining, & the analysis of its employees’ compensation. This includes calculating salaries, taxes, commissions, gross wages, & bonuses etc. team.
- Step 6:The obtained wage is the gross wage.
Let see the following examples.
An employee has $2,000 left every month after deductions. If his employment is eligible for a Medicare deduction of $250 per week and a tax cut of $500 per week, what is his gross wage?
Since there is a difference in the pay period unit, we will take the lowest given pay period, i.e., weekly rates. Hence, weekly deductions are:
- Tax cuts = $500
- Medicare = $250
Therefore, monthly deductions amount to $500 + $250 times 4, i.e. $3,000 per month. Hence, his monthly deductions are $3,000 per month.
This tells that his monthly gross wage is $2,000 + $3,000 per month = $5,000 p.m.
Two employees of an organization get deductions of Medicare and pension contributions from their wages. The deductions are as follows:
Assume that the wages of employees one and two after deductions are $82 and $81, respectively. What are the gross wages for each employee?
Gross wages can be calculated by adding back the deductions to the wages after deductions. Thus, total deductions are Medicare + pension contribution,
- After deduction-wage for employee one = $82
- After deduction-wage for employee two = $81
- Hence, gross wage for employee one = $82 + $18 = $100
- Similarly, for employee two it will be = $81 + $19 = $100
What is included in Gross Wages?
Gross wages include several items, and this is completely dependent on the type of employment and deductions the employee is eligible for. For general-purpose, the following are the inclusions –
- Over-time salary
- Holiday payHoliday PayHoliday pay is a bonus for employees as they get paid with standard wages even for the day off, such as Christmas or Thanksgiving. It isn't necessary, but some employers offer it as a reward for their employee's contribution to the company.
- Retirement benefits
- Pension contributions
- Tax deductions
- Sick pay
It should be noted that any deductions, irrespective of daily or monthly or annual pay, depending on the agreed-upon clauses in the employment agreement.
Gross wages are important from the perspective of both the employer and the employee. For the employer, they are a determinant of what the company is paying its employees. This is helpful for the company accounts from the tax perspective and management accounting. On the other hand, it is important for the employee to have an understanding of tax cuts and other deductions. It should be noted that tax deductions are liable on earnings before taxes in business settings. In the case of an employee, tax deductions are applicable to total or gross pay, which is the taxable incomeTaxable IncomeThe taxable income formula calculates the total income taxable under the income tax. It differs based on whether you are calculating the taxable income for an individual or a business corporation. of the employee.
Gross Wages vs. Net Wages
Gross wages are the wages an employee gets before various deductions, whereas net wages are the wages an employee gets after deductions. Net wages also refer to the in-hand pay or take-home salary/wage for an employee.
- They are a standardized format for employers. It is easy for employers to pay their employees on a common salary format.
- These wages are always greater than or equal to the net wages, and thus, any hike or increment to the employees is directly a function of these wages.
- It also determines the amount of pay earned by an individual before any deductions; hence it gives the total income earnedIncome EarnedEarned income is any amount earned by an individual, such as a salary, wages, or employee compensation. It can also be an individual's income through their own business. by the individual.
This article has been a guide to Gross Wages and its Meaning. Here we discuss step by step calculation of gross wages along with its formula, examples, and differences. You can learn more about from the following articles –