What is gross wages and how do you calculate it?

Payroll and finance are among the many processes small business owners need to be familiar with for business sustainability and success.

It’s important to understand how to pay employees and what percentage of their income you need to withhold to cover taxes and deductions. And, it’s equally important to accurately calculate salaries so you can budget wisely and avoid surprise payments in the future.

But you don’t have to be a finance expert to have a working knowledge of gross wages and how to calculate them. In this article, you’ll learn what gross wage means, how to calculate it, and why it matters to you.

Gross wages are the amount an employee earns before any taxes, benefits or deductions.

Generally, you’ll talk about gross wages any time you’re discussing compensation with a new hire who will earn minimum wage or Offer an increase to existing staff.

The amount of tax both you and your employee pay is based on gross wages.

Understanding Gross Wage as an Employer

Find employers who understand gross pay Payroll Management And finances are simple:

  • Salary Discussion: You will be in a better position to negotiate salary with employees.
  • Budgeting: Having an accurate record of income means you can set a realistic budget.
  • Predict: You can predict future income without worrying about surprises like unpaid taxes.
  • save time: When you pay the correct amount of tax, you don’t have to spend time correcting mistakes in the future.

Breakdown of Gross Wage: What’s Included?

You may be wondering, what exactly falls under gross wages?

Here are some examples of what gross wages might include:

  • Salary
  • Hourly wages
  • Piece rate pay (When an employee is paid a fixed amount for a job, such as a project or gig)
  • Overtime
  • Commission
  • Tips and Bonuses
  • holiday pay
  • sick pay

What can be deducted from gross wages?

Gross wages are subject to a long list of possible deductions. Some of them apply to all employees, while others are only necessary in certain situations.

Here are some common examples:

  • Federal Income Tax: This is a nationwide tax, and is calculated in a bracketed manner. It increases proportionally based on people’s income.
  • State Income Tax: Each state charges a certain percentage State payroll tax, Except for Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming, which have no state income tax.
  • Social Security: Employers and employees each contribute 6.2% of wages to Social Security, up to a taxable maximum of $147,000.
  • Medicare: Employers and employees contribute 1.45% to Medicare. Social Security and Medicare fall under the Federal Insurance Contributions Act (FICA).
  • Retirement Plan Contributions: If employees have a retirement plan such as a 401k, an amount is deducted from their gross wages each month to contribute to it.

Wage Fixation: This occurs when a percentage of someone’s earnings must be withheld due to a court order, which can be issued for credit card debt, student loan debt, child support, alimony, and medical bills.

Key Difference Between Gross Wages and Net Wages

Net wages are often called ‘Take Home Pay’ Because employees keep this amount after all deductions listed on their pay stubs.

Generally, the more you earn, the higher the taxes and withholdings.

To visualize the difference between gross salary and net salary, here are some examples for different salaries:

the state Annual Salary Monthly gross salary Monthly Net Pay
Texas $50,000 $4,167 $2,957
New York $100,000 $8,333 $4,912
California $120,000 $10,000 $5,891
Indiana $80,000 $6,667 $4,274

How to Calculate Gross Wages

How you calculate gross wages depends on whether you pay employees hourly or monthly.

Calculating gross wages for hourly employees

To calculate gross wages for hourly employees, you need to multiply their hourly rate by the hours they worked during the pay period.

For example, a part-time employee working 48 hours a month at $14 an hour would have a total salary of $672. You should include overtime pay in that calculation if applicable. So, if that same employee works another 10 hours of overtime, at time and a half rate (1.5 times their regular wage), they will earn an additional $210.

Calculating gross wages for salaried employees

For salaried employees, calculate their gross income by dividing their annual salary by the number of pay periods in a year.

For example, if someone earns $60,000 annually and gets paid every month, their gross salary would be $5,000.

Graphic brief
dimension Landscape = 1200 x 628
Image description A graphic table showing the starting gross wages with all deductions and residual totals

The first row shows an example of how pre-tax deductions can be made. The second row shows an example of federal and state tax deductions. The third row shows an example of how to account for after-tax deductions.

Inspiration or reference image https://www.patriotsoftware.com/blog/payroll/how-to-calculate-local-income-tax-withholding/

Your sketch (upload it to the graphics folder + set access to “Anyone with a link”)
How to Calculate Taxes and Deductions from Gross Wages
Step 1: Subtract pre-tax deductions Step 2: Withhold employee federal taxes Step 3: Account for other after-tax deductions
Gross salary = $5,000/month

401k = 10% for $500

Individual medical plan = $100

Total pre-tax deductions = $600

$5,000

– $600

$4,400

Federal income tax = $541

State income tax = $235

FICA tax = $304 (Social Security) and $71 (Medicare tax)

$541 + $235 + $375 = $1,151

$4,400

– $1,151

$3,249

Monthly life insurance plan = $60

$3,249

– $60

$3,189

Net pay = $3,189

Title on graphic How to Calculate Taxes and Deductions from Gross Wages
Copy the graphic [Row 1]: How to calculate taxes and deductions from gross wages

[Row 2, Column 1]: Step 1: Subtract pre-tax deductions

[Row 2, Column 2]: Step 2: Withhold employee federal taxes

[Row 2, Column 3]: Step 3: Account for other after-tax deductions

[Row 3, Column 1]: Gross salary = $5,000/month

401k = 10% for $500

Individual medical plan = $100

Total pre-tax deductions = $600

$5,000

– $600

$4,400

[Row 3, Column 2] : Federal income tax = $541

State income tax = $235

FICA tax = $304 (Social Security) and $71 (Medicare tax)

$541 + $235 + $375 = $1,151

$4,400

– $1,151

$3,249

[Row 3, Column 3]: Monthly life insurance plan = $60

$3,249

– $60

$3,189

Net pay = $3,189

Image source/credit that
Comment Reference images only serve as loose inspiration. Our design will be a landscape graphic in less steps.
Image caption Include a caption for the graphic (optional)
Alt text for images A graphic table showing the starting gross wages with all deductions and residual totals

The first row shows an example of how pre-tax deductions can be made. The second row shows an example of federal and state tax deductions. The third row shows an example of how to account for after-tax deductions.

fixed date

Once you know your employee’s gross wages, you can calculate the total amount of taxes and deductions that must be withheld.

Here’s how – using a California employee with a salary of $60,000 as an example.

Step 1: Subtract pre-tax deductions

First, deduct all pre-tax from your employee’s gross salary. Pre-tax deductions are subtracted before taxes are withheld, and they can reduce the amount of tax your employee owes.

Pre-tax deductions include things like health insurance premiums, 401k contributions, disability benefits and child care expenses.

An advantage of pre-tax deductions is that they reduce reportable income, reducing the amount of tax owed.

If our example employee in California contributes 10% of their salary to a 401k and pays $100 toward a private medical plan, for example, they have $4,400 left over as taxable income.

Step 2: Withhold employee federal taxes

Next, deduct the amount of federal tax you owe your employee based on the amount you have left over after pre-tax deductions.

In this case, the employee would pay $541 in federal income tax (10.83%) and $235 in state income tax (4.7%).

They also have to pay FICA tax: $304 (6.08%) for Social Security and $71 (1.42%) for Medicare taxes.

Step 3: Account for other after-tax deductions

Finally, subtract any after-tax withholdings, including court-ordered payments for child care, alimony or debt repayment, as well as things like employer-sponsored pension plans or insurance.

Say our example employee pays $60 a month after the deductible for life insurance.

After deducting all taxes and contributions, an employee earning $60,000 a year has a net salary of $3,314 out of a gross salary of $5,000.

Managing the payroll process through Homebase is easy

Caption: Process payroll easily with Homebase

To save yourself the headache and spend less time calculating payroll, use a simple tool like Homebase. You can automate the entire payroll process, including calculating wages and taxes — and send accurate payments to employees, the state and the IRS.

Here are a few more ways to build a homebase Salary a breeze:

  • It is designed for teams with hourly employees, Calculating gross and net pay is therefore equally easy for part-time and full-time employees, whether they are paid hourly or salaried.
  • Convert employee timesheets directly to wages. When employees clock in and out, Homebase calculates their hours and pay — including overtime hours and breaks.
  • Automatically send accurate payments to employees, states and the IRS.
  • Process your tax filings and issue 1099s and W-2s with zero hassle.
  • Employees can sign forms electronically. It’s safe and secure, and cuts down on paperwork for you.

Homebase is more than just a payroll software. It can help you manage all aspects including HR schedule, communication, consent, recruitmentand onboarding, so you can streamline your operations and spend more time doing what you love

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