Understanding the role that gross wages play in payroll processing is essential to paying employees correctly and complying with applicable employment laws. Employers who understand gross pay can manage payroll and finances easily. They are better positioned to negotiate salaries, have an accurate budget, forecast future earnings, and save time by not fixing mistakes.
What are gross wages?
A gross wage is the amount an employee earns as compensation for services performed for an employer before all payroll deductions, such as taxes and benefits. It’s also the value commonly referred to when discussing compensation with new hires.
Why are gross wages important?
Gross wages are important because they provide the basis for certain payroll calculations, 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 or salary
- Overtime pay
- Bonuses and tips
- Commissions
- Vacation pay
- Sick pay
How are gross wages different from net wages?
Gross wages are the amount an employee makes before payroll deductions and net wages remain after the deductions. Net pay is often called take-home pay because it’s the amount employees “take home” in a pay cheque or direct deposit.
How do employers calculate gross wages?
Gross wages are generally calculated by pay period – weekly, bi-weekly, semi-monthly or monthly. Check out the four examples below of calculating gross wages.
Salaried – paid monthly
Your salaried employee’s gross wages are $60,000, paid monthly. Divide the annual gross wage by their monthly pay frequency (12) to find their gross wages per pay period. Gross pay = $60,000/12
The employee’s gross monthly wage is $5000.
Salaried – paid biweekly
Your salaried employee’s gross wages are $70,000, paid biweekly. Divide the annual gross wage by the number of biweekly pay periods per year (26). Gross pay = $70,000/26
The employee’s gross bi-weekly wage is $2,692.30.
Hourly – no overtime
Your hourly employee makes $17 an hour and worked 30 hours the past two weeks. They did not earn any overtime. To calculate their gross pay, multiply their hourly wage by the number of hours they worked during the pay period. Gross pay = $17x30
The employee’s gross wages for this pay period are $510.
Hourly – overtime
Your hourly employee makes $20 an hour and worked 50 hours the past two weeks. In Ontario, overtime pay is working beyond 44 hours per week, which differs from province to province. Of the 50 hours, 6 were overtime. To calculate their gross pay :
- Multiply their hourly wage by the number of regular hours worked (44)
- Multiply the overtime rate (1.5 x $20) by the number of overtime hours worked (6)
- Add the total of regular wages and overtime wages to get the employee’s gross pay
Gross wage = ($20 x 44) + (6 x 1.5 x $20) 880
The employee’s gross wages for this pay period is $1,060.
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 and provincial income tax
- Calculate and withhold Employment Insurance (EI) and Canada Pension Plan (CPP) deductions
- Calculate and deduct any retirement plan contributions
- Pay employees their remaining net pay via direct deposit or pay cheque
- Deposit the employee and employer portions of the taxes with applicable government agencies
Frequently Asked Questions
What is the difference between gross pay and gross income?
Gross pay and gross income are the same for an employee. They are the amount of money employees are paid before taxes and any other deductions. As an employer, gross pay is the total amount of money paid to your employees, while gross income is the total amount earned through revenue streams.
What is the difference between base salary and gross wages?
A base salary is the employee’s earnings without additions such as bonuses, tips, and commissions. Gross wages are an employee’s base salary, including these additions.
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