A gross wage is the amount an employee earns as compensation for services performed for an employer prior to all payroll deductions for taxes, benefits or wage garnishments. It’s also the value that’s commonly referred to when discussing compensation with new hires. But what happens after pay negotiations are over? Understanding the role that gross wages play in payroll processing is essential to paying employees correctly and complying with applicable employment laws.
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What are gross wages?
A wage is money or the value of other benefits that is paid by employers to their employees as compensation for services performed. As mentioned previously, a gross wage is the total amount before all applicable deductions are withheld.
Why are gross wages important?
Gross wages are important because they provide the basis on which certain payroll calculations are made, including taxes and employee take-home pay. Failure to pay an employee all wages earned when due may lead to expensive wage claims, lawsuits or tax penalties.
What is included in gross wages?
Gross wages may include, but are not limited to:
- Regular pay by the hour, salary, or piece
- Overtime pay
- Bonuses and incentives
- Reported tips
- Retroactive pay increases
- Stock options
- Exception pay, e.g., sick, vacation, jury duty, bereavement or other paid time off (PTO)
- Fringe benefits to which employees are entitled as part of their compensation
How are gross wages different from net wages?
If gross wages are the amount an employee makes before payroll deductions, then it stands to reason that net wages are what remain after the deductions. Net pay is often referred to as take-home pay because it’s the actual amount that employees “take home” in the form of a live paycheck or electronic deposit to their bank account or paycard.
Gross wages vs. taxable wages
From a payroll processing perspective, taxable wages are an employee’s gross wages adjusted for any pretax benefits offered by an employer. For example, when employees enroll in an employer’s cafeteria plan for health benefits or a 401(k) retirement savings plan, they contribute their portion on a pretax basis*. These pretax contributions to qualified benefit plans are not considered wages for federal income tax purposes and are deducted from the total gross wages. The remaining amount, known as taxable wages, is subject to federal taxation.
*Employers will need to review federal and state tax laws to confirm eligibility requirements and tax treatment.
Gross wages vs. wages included on Form W-2
Form W-2, Wage and Tax Statement, shows an employee’s annual taxable wages, not gross wages. That’s why the earnings shown on a Form W-2 are usually less than the year-to-date total gross wages on the employee’s final pay statement of the year.
Gross wages vs. FICA wages
Federal Insurance Contribution Act (FICA) wages are those that are taxed for Medicare and Social Security.
Gross wages vs. Medicare wages
Wages taxable for Medicare are typically less than gross wages because of an employee's eligible contributions to pretax benefits. The Medicare tax rate is 1.45% on the first $200,000 of taxable wages paid. For taxable wages above $200,000, an additional 0.9% is withheld for the remainder of the year.
Gross wages vs. Social Security wages
Wages taxable for Social Security are also typically less than gross wages because of an employee's eligible contributions to pre-tax benefits. The Social Security tax rate is 1.45% until the employee reaches the wage base limit, after which no further Social Security taxes are withheld for the remainder of the year.
How do employers calculate gross wages?
Gross wages are generally calculated by pay period – weekly, bi-weekly, semi-monthly or monthly. They include all payments for services performed, as well as other values that make up compensation, e.g., fringe benefits, stock option transactions, etc.
Gross wages for nonexempt employees paid on a per-hour basis
Calculating gross wages for hourly, nonexempt employees requires a method of tracking time and attendance and strict adherence to the Fair Labor Standards Act (FLSA), which among other things, governs minimum wage and overtime. Under this federal law, eligible, nonexempt employees are entitled to minimum wage and no less than one and a half times their regular rate of pay for each hour worked over 40 in a workweek. So, if an employee is classified as nonexempt under the FLSA, is paid $13.00 per hour and works 45 hours in a workweek, the individual’s gross wages for the week would be (40 x $13.00) + (5 x $19.5) = $617.50. Note: state laws regarding overtime may vary.
Gross wages for exempt employees paid on a salaried basis
Because most salaried employees are exempt from the FLSA and not eligible for overtime, calculating their gross pay is a bit simpler, as long as they aren’t paid any additional compensation or other value. For example, if an employee is paid semi-monthly, or 24 times per year, and the annual salary is $72,000, then the employee’s gross pay per pay period would be $72,000/24 = $3,000.
How do employers use gross wages for payroll processing?
Calculating an employee’s gross wages is the first step in running payroll. From there, employers generally:
- Deduct pretax contributions for eligible benefit plans
- Calculate and withhold federal income tax and state and local income tax, if applicable
- Calculate employer and employee FICA taxes (Social Security and Medicare)
- Deduct the employee portion of FICA tax
- Calculate the employer’s portion of federal and state unemployment tax*
- Deduct after-tax, voluntary deductions and wage garnishments, if applicable
- Pay employees their remaining net pay by live paycheck, direct deposit or paycard
- Deposit the employee and employer portions of the taxes with government agencies
*Note: most unemployment tax is paid by the employer, but there are other taxes, such as state disability or paid family and medical leave tax, which require employee contributions. Additional deductions may apply depending on state and local requirements.
Frequently asked questions about gross wages
Do cash tips get added to gross wages?
Employees who receive cash tips of $20 or more per calendar month must submit a written report to their employer with the total amount of tips they receive. This report is due no later than the tenth day of the following month. When employers receive it, they need to include the amount in gross wages and calculate, withhold and deposit the applicable taxes.
What is the difference between base salary and gross wages?
A base salary is the amount an employee earns prior to other forms of compensation. When the base salary and additional compensation are combined, the total is the employee’s gross wages.
Where do I find total gross wages and taxable wages?
Gross wages are typically displayed on an employee’s pay statement in the earnings section, although other types of compensation, such as the value of fringe benefits, may be displayed in another section. Taxable wages for the calendar year are typically shown on an employee’s Form W-2 in Box 1 “Wages, tips, other compensation.”
This guide is intended to be used as a starting point in analyzing gross wages 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.