How to Calculate Gross Wages

What are gross wages?

Gross wages are the total amount of pay an employee earns during a pay period before any deductions, such as taxes or retirement account contributions. 

For example, a chief of finance earning a salary of $100,000 has annual gross wages of $100,000. With semi-monthly paychecks, this employee’s gross salary per pay period is $4,166.67 ($100,000 ÷ 24 pay periods per year).

An hourly employee who earns $20 per hour and works 40 hours in a week has gross wages of $800 for the week ($20 per hour x 40 hours). 

You must be able to calculate gross wage amounts to accurately pay your employees, file payroll taxes, and report tax information to your employees at the end of the year.

The difference between gross and net wages

Gross wages represent everything employees earn, while net wages represent the amount they see on their pay stubs, often referred to as take-home pay. The difference between gross and net wages is equal to the total deductions for federal, local and state income taxes; retirement contributions; automatic contributions; and other reductions in pay. 

For example, say you have a full-time employee who earns $20 per hour in a location with no state income tax. Their gross pay, deductions and net pay are as follows:

What should I include in gross wages?

Gross wages include different types of pay based on whether an employee is hourly or salaried. For salaried employees, gross wages include salary, bonuses and any additional pay. 

For hourly employees, gross wages include hourly pay, overtime pay, piece-rate pay, bonuses and any other earned pay. Gross wages may also include payment for travel time, training, on-call hours and breaks, depending on the labor laws in your location and your discretion. 

For both salaried and hourly workers, gross wages include tips and commissions.

If you reimburse employees for expenses and use an accountable plan as described by the Internal Revenue Service, do not include expense reimbursements in wages. This is essential to avoid your employees having to pay tax on reimbursements. [See our guide to mileage reimbursement laws and policies.]

The difference between gross wages and payroll cost

Gross wages only include the amounts your employees earn. You have many other expenses related to payroll that aren’t included in gross wages, such as the employer-paid portion of Social Security and Medicare taxes, the cost of employee benefits and employer contributions to retirement accounts. [View the best employee retirement plan providers.]

It’s crucial to know your total payroll cost as part of understanding and planning for your business.

>>Read next: Can SMBs Balance Payroll Burden and Labor Demand?

How to calculate gross wages

Below, we break down how to calculate gross wages with numerical examples for hourly and salaried employees.

How to calculate gross wages for hourly employees

Calculate an hourly employee’s gross wages by following these steps.

1. Verify the employee’s hourly wage. Check payroll records to confirm wage rates.
2. Determine the number of hours worked. Use high-quality time and attendance software to determine the actual number of hours worked.
3. Include breaks, paid time off (PTO), holiday pay and other paid hours. For example, if you pay the employee during their half-hour lunch breaks and the employee also took a full eight-hour paid sick day this week, include these hours in their total work hours. If you don’t pay for breaks or sick leave, exclude these hours.
4. Multiply the employee’s total work hours by their hourly wage. For example, if the employee worked 40 hours during the week at a wage of $22 per hour, their gross wages are 40 hours x $22 = $880.
5. Add overtime pay. Gross overtime wages require a separate calculation, explained in more detail below.

Another example may prove helpful. Let’s say you’re calculating gross wages for an hourly employee who worked 30 hours this week. The employee also took five half-hour unpaid lunch breaks not included in the 30 hours worked and attended unpaid training for three hours. Additionally, the employee earned commissions of $500 this week and earns $30 per hour for their base rate. The gross wages are calculated as follows:

(Hours worked x Hourly wage) + Commission = Gross wages

Hourly wages (30 x $30 per hour)      $900

+

Commission                                            $500

Total Gross Wages                              $1,400

How to calculate gross wages for salaried employees

To calculate gross wages and report payroll tax correctly for salaried employees, you need to determine gross wages for the pay period. Here’s how:

1. Verify the employee’s salary. Check payroll records to confirm the employee’s name, identifying number and salary.
2. Determine how many pay periods you have per year. There are 26 biweekly pay periods in a year and 24 bimonthly pay periods per year. Likewise, there are 12 monthly pay periods and 52 weekly pay periods per year. 
3. Divide the employee’s salary by the number of pay periods per year. For example, if an employee earns $60,000 per year and is paid bimonthly, their gross wage per pay period is $60,000 ÷ 24 = $2,500.
4. Add bonuses and commissions. If the employee earned a $1,000 bonus and $500 in commissions, add $1,500 to the employee’s gross wages for the pay period. In the example, this results in $4,000 ($2,500 salary + $1,500 bonus and commissions = $4,000).

Calculating gross wages for one or two employees is usually straightforward. If you have many employees, however, calculating gross wages accurately can become more complicated. If you make a mistake, employees may be paid more or less than they should be, or their tax information may be incorrect. To simplify payroll calculations and reporting, consider using payroll software, which we dive into below.

How to use payroll software to calculate gross wages

Some payroll platforms, such as Gusto, automatically calculate your payroll, including gross wages. (Check out our Gusto payroll review for details.) Other platforms, such as Rippling, require just a few clicks and are almost as convenient as fully automated payroll. (Read our Rippling HR software review for more information.)

Whatever payroll service you use, processing payroll should be simple once your employees enter their Form W-4 information and you enter their wages.

How gross wages and overtime work

Special considerations go into calculating gross wages for hourly employees who work overtime hours. Hourly employees are generally nonexempt from the Fair Labor and Standards Act (FLSA), which governs overtime. This means you must pay them at least time-and-a-half for all hours over 40 they worked during a workweek. 

For example, say an employee earns $20 per hour and works 45 hours during a workweek. They’ve worked five hours over 40. As such, you must pay overtime wages for those hours. The employee’s time-and-a-half wage would be $20 x 1.5 = $30. Given this overtime rate and the employee’s standard rate, here’s how you would calculate their gross wages for the pay period:

States overtime rules vary. For example, some states count any number of hours worked over eight in one workday as overtime. Under this definition, an employee who worked 40 hours during a workweek, but nine of the hours were on one workday, would qualify for overtime pay. The employee would earn one hour at the overtime rate and 39 hours at their standard rate.

Consult your local and state laws to determine your overtime requirements and get professional legal advice if you still have questions. When dealing with regulations regarding employee pay, you’re better safe than sorry.

Understanding gross wages is vital to your business

Whether you use payroll software or do the calculations yourself, understanding gross wages helps you pay your employees correctly, report payroll taxes accurately, and stay on the right side of labor and tax laws. You also need to calculate your gross payroll and total payroll costs as part of your cost of goods sold and overhead costs. The more you know about your company’s gross wages and payroll costs, and changing trends in those costs, the more effectively you can make sound decisions and financial plans for your small business. 

Max Freedman contributed to this article.