Have you ever wondered why the word gross is used to describe wages as well as bad sushi? We certainly did. It turns out, the reason for this isn’t quite as fun as we’d initially hoped. In fact, the word “gross” actually has multiple meanings. Many often think of the most common meaning, the one found first in the dictionary which says: “Glaringly noticeable usually because of inexcusable badness or objectionableness.” (This is actually a pretty awesome definition and something we dare you to tell your spouse when you don’t like their cooking).
But there’s another definition of gross, and it’s this: “Consisting of an overall total, exclusive of deductions.” This is the meaning we’re going to focus on today.
What are gross wages?
If you take the latter definition, you’ll begin to make sense of what gross wages or gross pay actually means. Gross wages are the total amount of money paid to an employee before deductions for things like taxes, health insurance, or other payroll withholdings.
What is net pay?
Net pay is the amount of money the employee actually receives–meaning it’s the money that arrives in their bank account after payroll withholdings and deductions. Because of these deductions, an employee’s net pay will almost always be less than the employee’s gross pay.
Gross pay - Payroll Withholdings/Deductions = Net pay
How often should employers be calculating gross and net pay?
Employers will usually want to calculate gross wages and net pay for every employee paycheck, so that the employee can see the difference between the two and understand the deductions being subtracted from the gross pay.
Good payroll software should do this for you automatically. If you’re calculating payroll yourself, and struggling with payroll withholdings and deductions, or it’s consuming a great deal of your time, you should definitely look into purchasing software to make this easier!
How to calculate gross wages for hourly workers?
To calculate gross wages for hourly workers, simply multiply the number of hours worked during a given pay period by the hourly wage of the employee.
For example, let’s say you have an employee who makes $10/hour. This employee works 20 hours per week. Your pay period is two weeks long. So during the two week pay period, the employee worked a total of 40 hours. Multiply this number (40) by the hourly wage (10):
40 hours x $10 = $400.
This employee’s gross wages for the two week pay period is $400.
How to calculate gross wages for salary workers?
In order to calculate the gross wages for salaried employees, you’ll want to take their annual salary figure and divide it by the number of pay periods in the year.
For example, if your company pays employees twice a month, the number of pay periods will be 24. If your company pays employees bi-weekly, the number of pay periods will be 26. If you pay employees monthly, the number of pay periods will be 12.
Based on your pay period schedule you’ll be able to find the gross wages for each individual check paid to your salaried employees.
Let’s look at an example. Pretend you have a worker who makes $50,000/year. Let’s also say your company pays employees twice a month, and therefore, you have 24 pay periods. The gross wage can be found by taking the salary ($50,000) and dividing it by the number of pay periods (24).
$50,000 / 24 = $2,083.33.
This employee’s gross wages for each pay period is $2,083.33.
Understanding the difference between gross pay and net pay is critical for both employers and employees. If you find yourself needing help with payroll, feel free to contact our team. Eddy builds payroll solutions that fit small business needs.