Gross Wages

Gross wages meaning

Gross wages and salaries are the amounts earned by an employee before taxes and deductions are taken from the paycheck. In other words, this term refers to the taxable compensation an employee receives.

What is included in gross wages?

The salary or wage itself is not the only thing included in gross wages. The following can also be included:

• Overtime pay: When employees work more than the standard working hours (usually over 40 hours per week), they are often paid at a higher rate for the additional time.
• Bonus payments: These are additional payments given for performance, meeting targets, or other achievements.
• Commissions: These are earnings from sales or other performance measures paid on top of or in lieu of a base salary.
• Tips: For jobs that customarily receive tips (like in hospitality and service industries), these can be included in gross wages if they are reported for tax purposes.
• Other earnings: This can include holiday pay, severance pay, awards, or other types of compensation provided by an employer.

What is the difference between gross wages and net wages?

Gross pay is the total earnings of an employee before any deductions are made. Net pay, on the other hand, is the amount an employee receives after all deductions are subtracted, often referred to as the ‘take-home’ pay.

For example, an employee’s monthly gross wage might be $5,000. 

Net pay could look something like this:

Gross Wage ($5,000) – Tax (400) – Retirement contribution (300) – Other deductions (300) = $4,000

Medicare wages vs. gross wages

These two terms are commonly used in payroll processing, but they refer to different aspects of an employee’s earnings.

• Gross wages are the total amount of money an employee earns before any deductions are made. They include all forms of income, such as salaries, wages, bonuses, and any other compensation.
• Medicare wages are similar to gross wages but adjusted for certain items that are specifically taxable under Medicare, like non-taxable health insurance premiums paid by the employer. While gross wages are the broader category of total earnings, Medicare wages focus on what’s subject to Medicare taxes.

For most employees, both terms are the same. However, differences arise due to specific adjustments made for Medicare tax purposes, which ensure an accurate calculation of the Medicare tax owed.

How to calculate gross wages

There’s a difference between employees that receive a salary and employees that receive an hourly wage.

Employees who receive a salary

For a salaried employee, simply divide their annual salary by 12. For example, if an employee earns an annual salary of $75,000, their monthly gross wage equals $6,250.

For employees that paid hourly

If an employee, for example, earns $30 an hour and works 45 hours a week for three weeks per month: 

($30 x 45 hours) x 3 weeks = $4,050

Examples of deductions

Deductions are amounts taken from the gross wages, which will result in employees’ net pay. Some required deductions include: 

• Social security deductions
• Local, federal, and payroll taxes

Other deductions from the gross pay (that may or may not be required) include: 

• Retirement savings
• Medical benefits
• Work-related tools or equipment
• Other benefits offered by the employer.