Gross Pay: Definition, Calculation, and Why It Matters

What is Gross Pay?

Gross salary is an employee's total compensation for service. It includes the basic salary and additional earnings like bonuses, overtime pay, and allowances. 

Gross income is the amount an employee receives before mandatory or voluntary tax deductions. 

Gross pay includes employment income and income from every source. It also includes cashless income (e.g., property, gifts, company assets).

For example, if an employee's monthly salary is USD 6300, and USD 1700 includes benefits and taxes, then the gross salary is USD 8000.

Gross Pay Meaning vs. Net Pay

Whenever you look at any paycheck, you will find two components: gross and net salary. 

But what are these two? It can be confusing for both employers and employees. 

If you're wondering what is the difference between gross pay and net pay, let's discuss this here.

Gross salary is the total salary payable to your employees. It includes the basic salary and additional earnings like bonuses, overtime pay, and allowances.

Net salary, or 'take-home salary,' is payable to employees after deductions. These deductions can include TDS, pensions, gratuity contributions, etc. This amount is always less than the gross pay.

For example, an employee's total salary is USD 58,000 per annum. However, they have only received USD 40,000 per annum in their bank. Here, USD 58,000 is the gross pay, USD 40,000 is the net pay, and the remaining USD 18,000 is their total deduction, including professional tax, income tax (tax deducted at source or TDS), provident fund contributions, ESI contributions, etc.

Components Included in Gross Pay to Be Aware Of

Before we explain the calculation of gross pay or its difference from net pay, it is important to know the components included in gross pay. Being aware of these components helps in salary negotiation and tax compliance.

Direct benefits

Direct benefits include fixed components paid directly to the employee as a part of their regular compensation. 

• Basic salary: This is the core component of an employee's wages. It is a fixed amount that forms the foundation of an employee's salary structure. Based on the basic salary, other components like bonuses, retirement benefits, and HRAs are calculated.
• HRA: HRA stands for House Rent Allowance, which is given to employees for rental expenses. It varies location-wise and forms an important part of the gross salary, especially in cities with high rental costs.
• LTA: LTA stands for Leave Travel Allowance. It is an allowance for the employee's travel to any part of the country. Although not a common component, LTA often encourages employees to take a break and helps them rejuvenate.
• Special allowances: Special allowances are additional payments for food, travel, or any other job-related expenses. They are not fixed components and often vary with job roles, industry, the compensation structure of the company, etc.
• PF contributions: Provident Fund contributions are made to the employee's retirement fund. The amount is tax-deferred (employees have no tax burden unless they withdraw it) and is contributed equally by the employee and the employer.

Indirect benefits

Indirect benefits are occasional and do not always appear in the employee's paycheck. However, when granted, they enhance the overall compensation package. 

• Arrears: Arrears are due payments made to an employee. Partial payments that were not made in the previous pay cycle are adjusted to the current cycle as an arrear.
• Bonuses or incentives are performance-related payments or rewards commonly given once a year. They recognize goal accomplishments.‍
• Utility bills: Some employers offer utility bills as a part of a salary package, which covers electricity, water, phone bills, etc. It is an additional perk that is indirectly given as a reimbursement.

How to Calculate Gross Pay

Knowing how to calculate gross pay is crucial for an employer. This allows you to benchmark your employee's salary and create a proper budget plan.

Here are the most common ways of calculating gross pay for your salaried and hourly employees:

Hourly Employees

For an hourly employee, you can calculate the gross pay with this simple formula:

(Average amount earned per hour) x (Average number of working hours)

This will give you the gross weekly pay for your employees. Additionally, if your employees have worked overtime, multiply the overtime hours by the overtime pay rate. 

By adding regular and overtime pay, you will get the gross pay for your team members.

Salaried Employees

For salaried employees, you can calculate the gross pay with this simple formula:

(Salary per annum) / (total number of pay periods)

This will give you the gross pay per pay cycle for your employees. If your employee has worked overtime, you must add the total overtime pay to this amount to get the final gross pay. 

The overtime amount varies depending on the work type, working hours, and location. Your employees' bonus amounts will also be included in the gross pay.

Gross Pay Example

Here's how you can calculate gross pay for an hourly employee who has also earned overtime pay.

An employee has worked for 45 regular hours and an additional 5 as overtime in a week. The regular pay rate is USD 20 per hour, and the overtime pay rate is 1.5 times the regular pay. Thus, the gross pay of the employee would be:

45 regular working hours x USD 20 = USD 900.

5 overtime hours x (USD 20 x 1.5) = USD 150.

Gross pay = USD 900 + USD 150 = USD 1050 weekly.

Calculating gross pay for salaried employees is also easy. Here's an example to clear your doubts:

An auditor in a company earns a total salary of USD 50,000 annually, payable twice a month. The employee has also earned a total bonus of USD 7,000. Thus, the gross pay of the employee would be:

Regular pay per pay cycle: USD 50,000 / (12 x 2) = USD 2,083

Bonus per pay cycle: USD 7,000 / 1 = USD 7,000

Thus, the employee's gross pay is (USD 2,083 + USD 7,000) = USD 9,083 for their last pay cycle.

Now, here’s a section below to explain the difference between gross pay and net pay.

Gross Pay vs. Net Pay: Understanding the Difference

As mentioned, net pay is the amount an employee walks away with after all the deductions. In simpler words, gross pay minus deductions is known as​ net pay.

It differs from gross pay, which includes employee incentives, allowances, bonuses, etc. 

Here are the most common deductions to calculate the gross-to-net salary of your employees:

• Mandatory deductions: These deductions are mandatory by law, which include -
  • Federal income tax depends on the federal tax brackets and the employee's income slab.
  • Social Security contributions, the rate of which varies country-wise. Both the employer and the employee contribute an equal amount towards this fund.
  • Professional tax is a direct tax on all kinds of employment and trading.

• Voluntary deductions: These deductions are subject to the employee's choice, which include -
  • Provident fund, where it is the employee's choice to contribute a higher amount than the statutory limit.
  • Insurance premiums can cover dental, health, or visual insurance.
  • Additional insurance payments are available, where the employee can contribute more to the pension fund.

Typical Percentage Difference

If you're struggling to understand how much gross and net pay might vary, let's give you a clearer picture of percentages. The mandatory contributions vary country-wise, and the contribution rates fluctuate with the country's economy level and budget plans. 

Income tax percentages usually vary between 10% and 37%, depending on the income slab. Although not mandatory in every country, social security contributions range between 6% and 10% of the employee's basic salary. State income taxes are rare, which can be 3% to 6%. 

Why It Matters

Why do I need to know about net pay vs gross pay? If that's what you're wondering, here's your answer. Understanding the difference between the two helps you manage your finances better. 

From running a business to investment analysis, once you know how much you're paying your employees, predicting your finances becomes a cakewalk.

Understanding these terms will help you set financial goals and an earning benchmark for your employees. You will also get a clear idea of how much money you have left in your pocket for other expenses.

The Role of Gross Pay in Employment Benefits

Almost everyone tends to care about how much money they're taking home. The deducted amount remains forgotten. But did you know they're equally crucial since this amount significantly impacts an individual's long-term goals? 

This amount is the base on which tax liability is calculated. The gross salary also impacts the eligibility for greater benefits. A higher gross wage will make you eligible for higher retirement savings and greater insurance coverage. 

Any deduction, like EPF or PPF, is calculated based on gross income and not the net, and these deductions are directly proportional to gross income. Thus, the more gross pay there is, the higher the contribution and, ultimately, the savings. 

Is Gross Pay Before Taxes or After?

Gross pay is the salary amount before tax calculation. Since it is the total amount an employee earns, including bonuses, incentives, etc., is pre-tax income.

How to Calculate Take-Home Pay from Gross

Wondering how to calculate take-home pay from gross salary? Sweat no more, here's a simple equation:

Gross salary per pay cycle = The annual salary of an employee / the total number of pay cycles.

How are Hourly and Salaried Gross Pay Calculated?

How Skuad Can Help You Hire, Pay, and Manage Employees Globally

This blog focuses on gross pay meaning, helping you to understand its difference from net pay. Knowing the difference enables you to plan your long-term finances better. 

Understanding the two terms is vital for employers to ensure accurate payroll processing. 

Payroll accuracy helps maintain trust in the employer and contributes to employee satisfaction. It will also help employers be compliant with the tax authorities.

Skuad can be your ideal, comprehensive solution for hiring, paying, and managing employees across geographical borders. 

While you expand your business to multiple countries, let Skuad maintain payroll accuracy. The team is proficient in handling intricate global payroll, ensuring compliance, and extending proper employee benefits. 

Additionally, you can use Skuad’s employee cost calculator to assess your budget.

Skuad will help reduce your administrative burden and ensure compliance with local regulations. Start building your success story with us today!

FAQs

1. What is the meaning of gross pay?

Gross pay is the salary you pay your employees before mandatory or voluntary deductions. It includes the basic wage, bonus amount, house rent allowances, arrears, professional tax, etc.

2. What is the difference between gross and net pay?

Gross pay is an employee's total earnings before deductions. Net pay is the ‘take-home pay' an employee receives after deductions like taxes, pensions, etc.

3. How do I calculate net to gross?

If you’re wondering how to work out gross pay from net pay, it's simple. You must work backward from the net salary and add all the deductions to give you the gross amount. 

4. How do you calculate gross salary?

Calculating gross pay is simple. Adding bonuses and house-rent allowances to an employee's basic salary will give you their gross pay. You can also calculate by multiplying the hours worked by the hourly pay rate. 

5. Which is greater gross pay or net pay?

Gross pay is always higher than net pay. This is because gross income includes all incentives, allowances, and bonuses.