Gross pay is the amount of wages or salary that is paid by an employer to an employee. The amount reflects the total amount of pay before any deductions of any type are withheld from the pay. Once the appropriate deductions are completed, the employer presents the remaining amount, known as net pay, to the employee.
To calculate gross pay for hourly employees, the employer will simply multiply the number of hours worked by the agreed upon hourly rate. In the event that the company operates in a country where laws governing overtime pay are involved, the formula will be adjusted to include any additional funds due the employee for hours worked above and beyond the norm. Once the gross payroll is calculated, the employer can move forward with applying any deductions associated with each employee account.
There are a number of different types of deductions that are subtracted from this total amount, the most common of which has to do with taxes. In most countries, employers will deduct national, state, and local taxes from the gross pay earned by each employee. A pay calculator is often used to determine how much must be withheld in terms of taxes for each applicable jurisdiction.
The deducted funds are forward to the appropriate tax agencies on behalf of the employee, who receives an itemized list of how much tax was withheld for each jurisdiction involved. The list appears on what is known as a pay or check stub, and makes it very easy for the employee to see how much was withheld and subsequently paid to each tax agency.
Along with taxes, health insurance costs may also be deducted. While some employers pay health coverage costs in full, others choose to split the cost with each employee that is enrolled in the plan. A percentage of the monthly premium is withheld by the employer and combined with the employer’s share for the group insurance coverage, then forwarded to the provider.
Other types of withholding may also apply. For example, the employee may opt to have a portion withheld and placed into a retirement or pension plan, or divert a portion of the funds directly into a savings account. In the event the employee has court ordered child support, that amount may also be withheld and sent to the court by the employer. The same is true with any court-ordered garnishments or liens that may have been placed on the employee by a creditor.
It is important to note that people who are classified as independent contractors receive gross pay from their clients. The contractor is responsible for paying taxes and any other obligations from the gross paycheck rather than the client.