Gross pay is the total amount an employer owes his employee for a specific pay period. It's extremely important in the world of payroll as it's used to calculate an employee's hourly wage or salary, overtime, social security tax, income tax and deductions.
Gross pay consists of hourly and/or salaried pay and overtime, i.e. hours worked in excess of the maximum 40 hour work week. Gross pay is the pay rate employers and employees agree upon for services employees will render at their job.
When an employee is hired, a written contract or letter specifying his duties, works hours and pay rate should be made for the employer and employee to sign so there are no misunderstandings as to how much an employee will earn on the job.
Calculating Gross Pay
Employees may get paid by the hour or via an annual salary.
Those who get paid by the hour are responsible to keep tabs of their work hours via a time clock, time sheet or other form of recording work hours. To calculate gross pay for an employee who's paid hourly, simply multiply the hours they worked in a particular pay period by their hourly pay rate. Employees who work in excess of the 40 hour maximum work week may receive overtime pay in addition to their 40 hour pay.
To calculate gross pay per pay period of salaried employees, divide their annual salary by the number of times they get paid annually. If, for example, an employee's annual salary is $30,000 and they receive a paycheck bi-monthly (twice a month), they would get paid 24 times in the course of a year. By dividing $30,000 by 24, you get $1,250 -- gross pay per pay period. Salaried employees that make above a certain amount annually don't qualify for overtime.
Other benefits that hourly or salaried employees receive such as reimbursements or bonuses will increase their income but aren't included in gross pay. These extra funds generally come in separate checks for employees to cash.
Overtime Pay
The minimum overtime pay rate is regulated by Federal law. It's calculated as one and a half times the hourly rate of an employee for work hours that extend above 40 a week. In some states, the overtime rate is higher than Federal requirements. Employers in these states must adhere to their state's requirements. Salaried employees that make below a certain amount ($23,660) annually also qualify for overtime pay.
If you were to calculate gross pay to include overtime for an employee that earns $10 an hour and works 45 hours a week, it may look like this:
$10 x 40 hours = $400 gross pay
$10 x 1.5 x 5 hours (overtime) = $75
Total gross pay for the week = $475
Payroll is clearly an important aspect of a business. We can provide you with professional payroll services that will keep this aspect of your business running effectively and smoothly. From accounting to tax preparation to financial management, contact us today for all your business needs.
