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Gross Wages

Gross wages are the pay an employee receives before tax and other deductions. In contrast, take-home pay depends on state tax laws, insurance situation, and other deductions. Because of that, gross wages are usually significantly higher than net wages.

What Constitutes Gross Wages?

All money received in return for labor gets taxed. Which is also subject to mandatory and voluntary deductions. Gross wages are all forms of payment someone receives as compensation for their work before deductions. They can come in the form of :

  • Salary
  • Hourly wages
  • Commissions
  • Overtime
  • Performance bonuses
  • Tips
  • Sick pay
  • Paid vacation 

In addition to federal, state, and local tax, take-home pay gets reduced by health and dental insurance premiums, 401k contributions, and the like. Court-ordered wage garnishments can also reflect on the net pay an employee takes home. Such garnishments may include child support, student loan, credit card debt, alimony, or medical bills. Back taxes are another factor that may reduce the overall take-home pay for the employee.

Salaried employees usually have their employers cover a part of the deductions. Hourly wage workers typically have to take care of these expenses in full. That is why the difference between gross and net wages for salaried employees is less.

Why Do Gross Wages Matter?

Understanding the concept is crucial because gross wages determine the taxes and deductions one has to pay. That is important for both employees and employers.

The worker needs to understand the difference between their gross and net wages. Properly calculating them helps budgeting and overall better handling of their finances.

On the other hand, companies can't afford to miscalculate gross wages. They have to contribute to federal and income tax, social security, and Medicare based on the difference between gross and net wages. Mistakes here can create problems for their employees. Accidental or deliberate errors in these calculations can also put them in hot water with the IRS.

If an employer under-withholds their employees' tax and other deductions, they have to fix the error by the end of the tax year. In case they over-withhold them, they need to refund the employee. Under federal law, an employee may request that to happen with their next payment. Mismanagement of the gross wages calculations means a lot of extra paperwork for a business. In the worst-case scenario, it opens it up to lawsuits and investigations by the IRS.

Calculating Gross Wages

Companies use different methods to calculate the gross wages of salaried employees and hourly-wage workers. Whether they are dealing and a full-time or a part-time employee can also affect the formulas they use.

Calculating the Gross Wages of a Salaried Worker

Businesses use the annual salary of full-time salaried employees as a base. First, they divide the annual salary by 12 to determine the monthly gross wages. For example, if a person makes $48 000 a year, their monthly gross wage is $4000.

Calculating Gross Wages of an Hourly Worker

The method used in these cases is slightly different. The typical hourly employee gets paid weekly or bi-weekly. The frequency depends on their arrangement with the employer and the particular state legislation. In the case of a part-time hourly employee who works 20 hours a week for $17 an hour, their weekly gross wage will be $340. A full-time hourly employee who works 40 hours a week has a gross pay of $680 a week. Hourly employees in most states are entitled to overtime as well. It is usually a time and a half their typical wage. Using the same example, if a full-time employee works 5 hours overtime, they will receive $127.5 on top of their weekly pay. Thus, their gross wage for that week is $807.5.

Businesses need to know what their state overtime laws are. Some states have different regulations for calculating overtime.

Gross Wages and Deductions

After calculating the gross wages, employers have to figure out the deductions. That happens in several steps:

  • They determine the pre-tax deductions. These pre-tax deductions can be fixed each payment cycle or a percentage of the gross pay.
  • They withhold the employee's taxes. The taxes depend on the federal, state, and local tax laws. They are calculated based on the gross wages minus the pre-tax deductions.
  • The last step is managing the after-tax deductions. Like the pre-tax deductions, they are either a fixed amount or percentage. In this case, however, the calculations are made based on the gross wage minus the pre-tax and the tax deductions.

The Importance of Gross Wages for Payroll

Gross wages are the starting point for each payroll of the employee. The calculation of gross wages and the necessary deductions used to be a hassle for big businesses. Matters can become pretty complex if the company's workforce consists of many workers, especially if they are a mix of salaried and hourly employees. Today, however, there is software that does the calculations. These gross wage calculators are easy-to-use, automated tools that negate the need of entire HR and accounting departments. Even mid-to-large enterprises can have one person deal with the matter now instead of hiring whole teams or outsourcing the job.

W-2 and Gross Wages

The W-2 form is a crucial document for your federal and state taxes. It shows the information about all income you have earned throughout the year. It also states the taxes withheld by your employer, along with all benefits paid and other financial information. As such, the W-2 form is tightly related to your gross wages. Note that the sum in the W-2 and your overall gross pay for the year may differ. The reason for that is that some pre-tax deductions aren't taxable income. Medicare and pension plans are examples of such non-taxable deductions.

Gross Wages and FICA wages

Federal Insurance Contributions Act (FICA) wages is another term for Social Security and Medicare taxes. You can find them in Box 4 on a W-2 form. Social Security tax is withheld on both salary and hourly wages. Tips and bonuses also require FICA deductions. Not all compensation, however, is subject to FICA taxation. Insurance, employer-sponsored disability, and travel reimbursements are examples of payments that you don't need to pay FICA on. The non-FICA pay you receive throughout the year affects the difference between your annual gross wages and W-2 income.

Gross Wages on a Paystub

If you want to find your gross wages, just look at your paystub. In the standard pay stub form, the gross wage is the highest number at the top of the document. If you add up the gross wages from each pay stub you get throughout the year, you will find your annual gross wage. The same sum should be in Box 1 of your W-2 form. The amount reflects all money you have received from your employer, including salary, bonuses, hourly wages, overtime, and commissions.