Whether you're someone who gets paid by the hour or earns a yearly salary, you might have come across the term gross pay or net pay on your pay statement or paycheck. It's important to understand what these terms mean so that you know exactly how much you're earning and what you're receiving as your pay.
In this article, we've come up with a small guide that includes all the vital information regarding what gross pay is, how you can calculate it, what the components include, and more. So, let's not waste any more time and jump right into it, shall we?
What is Gross Pay?
Gross pay or gross salary is the amount of money shown before any deductions and taxes are taken out. Your gross pay will frequently show up as the highest number you see on your pay statement. It reflects the total amount your employer pays you which is based on either an hourly wage or a previously agreed-upon salary.
For instance, let’s say that your employer pays you a yearly salary of $30,000 per year. This is the amount you’ve earned in gross pay. Here’s another example of gross pay in hourly wages - your employer has agreed to pay you $20 per hour and you work for 30-40 hours during the pay period. Then your gross pay comes to a total of $600-$800.
What are the Components of Gross Pay?
There are a number of components included within gross pay and they are as followed:
Wages and salaries
Piece rate pay
So, whether you work on a yearly rate or an hourly rate, the calculation ultimately depends on the amount that you've agreed upon with your employer. Make sure the amount or pay rate you've agreed upon is also confirmed in wiring before you start working.
What is Net Pay?
To understand what gross pay is, we must also dive into understanding what net pay is as well. Net pay is the total amount of money you receive after all the taxes and deductions have been made. This is the amount that gets deposited into your bank account or on your paycheck.
It’s common for your net pay to be shown in bold or a larger font on your paycheck or statement, making it easy for you to distinguish it from your gross pay.
So, now you can understand the clear difference between gross pay and net pay. Gross pay is the amount of pay before any deductions have been made and net pay is the amount you receive after the deductions are done.
What is Deducted from Gross Pay?
Now that we know the difference between net pay and gross pay, let’s move on to understanding what is deducted from gross pay in more detail. Keep in mind, this can vary on what country and company you live in and work for.
So, with that in mind, let’s take a look:
Taxes are compulsory and based on your government’s taxation system, the amount is deducted from your gross pay. So, depending on how much your total salary is, the tax will be based on a percentage of your total income.
2. Retirement Contributions
Retirement contributions are the money that’s deposited into your pension, and it’s usually just a percentage of your gross pay. In most countries, the practice is to deduct a fixed percentage of the pay towards the state pension. Other countries give their citizens the chance to contribute to either a company or private pension.
Incentives can be either short or long-term. For instance, a short-term incentive can be seen as a bonus that’s paid within the same year once exact targets are met. A long-term incentive can be seen as a 3-5 year bonus that’s paid in equity, cash, or shares within the company.
It’s important to keep in mind that these bonuses are referred to as taxable income, which is why it’s deducted from your gross pay.
4. Insurance Deductions
When it comes to health insurance, it’s most likely a part of your benefits package. This amount can expend on what the health insurance scheme is in your country and which company you’re working for. Generally, insurance premiums are deducted from your gross pay before tax.
5. Employee-Specific Deductions
If you’re employed in a place where you have to wear uniforms or use special equipment to do your work, then chances are you can be considered eligible for payment towards these costs. However, this has to be mentioned in your employment contract.
It’s vital to consider that some of these employ-specific deductions are pre-tax deductions. This essentially means that money is taken from your gross pay before the related taxes have been applied such as healthcare or retirement contributions.
These are also known as post-tax deductions and are sometimes taken after taxes have been posed or after net pay has been applied. For instance, charity donations or union fees.
Calculating Gross Pay for Hourly Employees
To calculate your gross pay if you work at an hourly rate, you first have to multiply the number of hours you've worked during your pay period by the hourly pay rate.
To put it simply, collect your attendance log or timesheet to find out how many hours you've worked during the pay period. Then, multiply the total number of hours you've worked by the hourly pay rate. If you've worked overtime, make sure it's also included in your gross pay.
Be mindful of other benefits that might be taxable to you that are not mentioned in your gross pay.
Calculating Gross Pay for Salaried Employees
When it comes to calculating your gross pay if you work at a yearly rate, you only have to divide the total amount of yearly pay by the number of pay periods within that year.
For instance, if your yearly pay is $15,000 and there are 24 pay periods in a year, then your gross pay per period will be $625. Remember to include other pay or benefits to it as well!
And that's all you have to do to calculate your gross pay if you're working at a yearly rate.