How it Works and Why It’s Important


If your employer doesn't provide gross pay and net pay figures or itemize payroll deductions, how can you know if their numbers are correct?

You just received your first paycheck. You calculated gross pay in advance by multiplying your hourly rate by the number of hours you worked. Maybe you’re surprised to see that the number on the stub doesn’t match what you were expecting.

You’re probably wondering if there’s been a mistake. Of course, your take-home (net) salary is likely correct if you have an employer that doles out your paychecks.

Nonetheless, it can be disheartening to see your money leave your pocket before you’ve spent it. However, the gross amount you earn has a purpose. Below, we’ll briefly cover the importance of gross pay juxtaposed to your net salary.

What is gross pay?

Gross pay refers to the amount used to calculate the wages of an employee’s hourly or salary earnings. It’s the total amount an employee earns before deductions such as taxes, social security, Medicare, insurance, charity, or pension. The following are calculated in the category of gross pay:

  • Wages
  • Shift Differentials
  • Bonuses
  • Commissions
  • Vacation Pay
  • Piece Rate Pay
  • Holiday Pay
  • Sick Pay

The amount an employee is paid is determined by both the employer and employee. It must be agreed upon — in writing — before starting a contract, employment, or shift.

What’s the difference between gross and net pay?

The main difference between gross pay and net pay can be found in the deductions. Gross pay is an employee’s total earnings. Net pay is paid out to an employee after all deductions are calculated. Simply, net pay equals gross pay minus deductions and taxes.

However, the amount an employer must deduct can become quite complicated quickly. This is why paystubs typically come with a breakdown of your deductions and the amount your employer withheld. With this reference point, it’s easier for both the employer and the IRS to see where money is going.

Why is gross pay important?

It’s easy to see why net pay is significant. You can actually see your money go toward services such as Medicare, taxes, and retirement savings.

Gross pay is what you earn overall. Knowing that amount isn’t nearly as crucial to the employee, especially when their net pay is what they can actually spend. However, knowing the amount of your gross pay can help prevent fraud.

If your employer doesn’t itemize your net pay with how much money they’re removing from your gross pay for deductions, how do you know that their number is correct? Furthermore, how will you know that you’re receiving the wage you’re meant to earn? Employees who have that information readily available can determine if their gross and net pay is calculated fairly.

How do I calculate gross pay?

Calculating gross pay is typically simple whether you’re an hourly or salaried employee. However, calculating overtime gross payment may change depending on the state you live in.

Hourly Payment

To arrive at the gross pay for an hourly employee, multiply the number of hours worked during the pay period against the hourly rate. To get the information for this calculation, follow these steps:

  1. Get the attendance log or timesheet for your employee and add up their hours worked.
  2. Multiply their hours worked (i.e. 80) against their hourly pay rate (i.e. $20).
  3. Add overtime hours to gross pay (i.e. $20×1.5=$30, add $30 for every overtime hour).
  4. Add other benefits that aren’t included in gross wage payment (i.e. shift differentials, commissions, holiday pay, etc.).
    • Depending on the hourly wage added, you may need to place this in a different category. For example, vacation pay gets its own “bank” that can only be used once the employee goes on vacation or asks to use it.

For more information on how to calculate overtime pay, see below.

Salary Payment

Salaried employees are paid a consistent wage regardless of how many hours they work. Therefore, you only need to calculate the total yearly payment amount against the number of pay periods in the year.

There are usually 24-26 pay periods in a year. If the salaried employee’s gross pay is $1000 per pay period, you would calculate $1000 x 24 = $24,000.

Overtime Payment

Overtime payment is normally 1.5x the hourly rate of an employee who works more than 40 hours a week. However, employees who live in California, Alaska, Colorado, or Nevada are also paid overtime based on the hours they worked in a day. Therefore, if someone in those states works longer than eight hours in a single day, they are paid 1.5x on every hour after the 8th.

Typically, salaried employees are exempt from overtime unless they’re lower-paid employees that don’t make more than $455 a week or $23,660 a year.

Employers should add overtime payment after they’ve calculated their employees’ normal wages. If your employee made $2000 in a pay period, but they have 10 hours of overtime, and their wage is $25 an hour, their overtime wage would be $375 ($25×1.5 = $37.5×10= $375).



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