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Gross pay is what employees earn before taxes, benefits and other payroll deductions are withheld from their wages. The amount remaining after all withholdings are accounted for is net pay or take-home pay. Employers who familiarize themselves with these two terms are often better equipped to negotiate salaries with workers and run payroll effectively.

What is gross pay?

As previously mentioned, gross pay is earned wages before payroll deductions. Employers use this figure when discussing compensation with employees, i.e. $60,000 per year or $25 per hour. Gross pay is also usually referenced on federal and state income tax brackets.

Calculating gross pay

The method for calculating gross wages largely depends on how the employee is paid. For salaried employees, gross pay is equal to their annual salary divided by the number of pay periods in a year (see chart below). So, if someone makes $48,000 per year and is paid monthly, the gross pay will be $4,000.

To calculate gross pay for hourly workers, multiply the hourly rate by the hours worked during a pay period. For example, a part-time employee who works 35 hours at $12 per hour will have a gross pay of $420. Overtime rates must also be accounted for, if applicable.

Calculating gross income

To calculate gross income, multiply the employee’s gross pay by the number of pay periods (see chart above). For instance, if someone is paid $900 per week and works every week in a year, the gross income would be $46,800 per year.

Net pay

The compensation that employees get to take home depends on a variety of payroll deductions, some of which may be voluntary, whereas others are mandatory.

What affects net pay?

  • Federal income tax withholdings
    Federal income tax responsibility is calculated using a bracket system that increases progressively based on income.
  • State income tax withholdings
    Like the federal government, many states use progressive tax brackets, but others have no income tax at all. Additionally, some cities impose their own income tax.
  • Social Security and Medicare taxes
    The Social Security tax rate is 6.2% and Medicare is 1.45%. These taxes are also known as Federal Insurance Contribution Act (FICA) or payroll taxes; employee contributions must be matched by employers.
  • Wage garnishments
    A court can order employers to withhold a percentage of an employee’s wages to pay for incurred debt. Examples of garnishments include credit card debt, student loan debt, child support, alimony, medical bills and back taxes.
  • Health insurance premiums
    Although employers typically cover the majority of health insurance premiums, employees often will also make contributions to health insurance premiums each pay period.
  • Retirement savings
    Contributions to some retirement plans, such as 401(k), are taken out of gross pay.
  • Form W-4, Employee’s Withholding Certificate
    When employees start a new job, they may fill out a Form W-4, which provides information about their filing status (single, married, head of household), dependents and other sources of income. These details directly impact how much federal income tax is deducted each pay period.

Calculating net pay

When calculating net pay, employers and HR professionals generally follow these basic steps:

  1. Calculate gross pay using the hourly rate multiplied by the total hours worked or the salary divided by the number of pay periods
  2. Deduct health insurance premiums, 401(k) and other pre-tax contributions
  3. Withhold all taxes, including federal income tax, FICA taxes and state and local taxes
  4. Garnish wages for any court-ordered payments that apply

This guide is intended to be used as a starting point in analyzing an employer’s payroll obligations and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.

Trusha Palkhiwala, Divisional Vice President, Global HR Shared Services, ADP

Trusha Palkhiwala Divisional Vice President, Global HR Shared Services, ADP Trusha ensures Global HR Shared Services delivers service excellence through digital transformation, focus on client service excellence, continuous improvement programs and global simplification projects.