What Is Gap Pay and How Does It Work?

Gap pay refers to compensation designed to bridge a financial difference for an employee. Its purpose is to maintain an employee’s financial stability when regular earnings are temporarily reduced due to an absence from work. This compensation covers the difference between an employee’s typical salary and a lower amount received from other sources during that period, helping individuals meet financial obligations despite a temporary income change.

Common Situations for Gap Pay

Gap pay commonly applies in situations where an employee’s regular income is temporarily reduced. A primary scenario involves military leave, where employees called to active duty or training receive military pay less than their civilian salary. Gap pay, often termed “differential pay,” covers this difference, helping service members maintain financial stability.

Jury duty is another common instance. Employees receive a nominal stipend for jury service, which is often significantly lower than their regular wages. Employers may offer gap pay to supplement this stipend, ensuring the employee does not experience a substantial loss of income while fulfilling their civic duty.

Gap pay can also apply when an employee is out of work due to a short-term disability or a workers’ compensation claim. Benefits from these sources usually provide a percentage of pre-disability wages (often 60% to 66.67%). Some employers supplement these benefits, bringing the employee’s income closer to regular pay, which can be helpful during recovery.

Beyond these, some employers offer gap pay for other approved leave types as part of their benefits packages. This might include bereavement leave, extended family leave, or sabbaticals, depending on company policy. These scenarios demonstrate the discretionary nature of gap pay and a company’s commitment to supporting its workforce.

Determining Gap Pay Amounts

The calculation of gap pay focuses on the difference between an employee’s regular earnings and any other income received during an absence. The core principle involves subtracting the lower income, such as military pay, a jury stipend, or disability benefits, from the employee’s standard gross pay.

Defining “regular pay” is a key step. For hourly employees, it refers to their standard hourly wage multiplied by their usual hours worked. For salaried employees, it is their fixed salary. This “regular pay” typically excludes variable compensation like overtime, bonuses, or commissions, unless the employer’s policy explicitly states their inclusion.

External income sources considered in the calculation are those directly offsetting the employee’s regular pay during the absence. For military leave, this is military base pay. For jury duty, it is the daily stipend from the court. For disability or workers’ compensation, it is the benefits paid by the insurance carrier or state program.

Employers may use various methods to determine the exact gap pay amount. Some policies aim to top up the employee’s total income to 100% of their regular pay. Other policies might top up to a specific percentage, such as 80% or 90%. Less commonly, some employers might offer a fixed daily or weekly amount regardless of the actual income difference. The calculation period aligns with the employer’s regular payroll cycles, ensuring timely and consistent payments.

Tax Implications of Gap Pay

Gap pay is generally considered taxable income and is subject to federal, state, and local taxes, similar to an employee’s regular wages. This includes federal income tax withholding, applicable state and local income taxes, and Federal Insurance Contributions Act (FICA) taxes, which comprise Social Security and Medicare contributions.

For Social Security, employees contribute 6.2% of their gross pay, up to an annual income threshold ($176,100 in 2025). For Medicare, employees contribute 1.45% of all their earnings, with no income limit. A 0.9% Additional Medicare Tax applies to wages exceeding certain thresholds ($200,000 for single filers or $250,000 for joint filers).

An exception exists for certain differential wage payments made to employees on active military service. According to Internal Revenue Service guidance, these payments are subject to federal income tax withholding but are not subject to FICA or Federal Unemployment Tax Act (FUTA) taxes. This distinction applies to payments for individuals on active duty for more than 30 days.

Employers are generally required to withhold these applicable taxes from gap pay, just as they would for regular wages. The total amount of gap pay received by an employee, along with other compensation, is reported on their annual W-2 form.

Employer Policies and Legal Frameworks

Offering gap pay is often a voluntary benefit provided at the employer’s discretion, rather than a universal legal requirement. Many organizations outline their specific gap pay provisions, including eligibility criteria, duration, and calculation methods, within their employee handbooks or company policies. These policies ensure consistency and transparency in how such compensation is administered.

However, certain legal frameworks may influence or mandate similar supplemental pay in specific contexts. The Uniformed Services Employment and Reemployment Rights Act (USERRA) is a federal law that protects the job rights of individuals who serve in the uniformed services. While USERRA primarily focuses on reemployment rights and generally does not require private employers to pay differential wages during military leave, some state laws or collective bargaining agreements may provide additional benefits.

For instance, some public employers, such as federal or state government agencies, may be legally required to provide differential pay to employees on military leave. Employees should consult their employer’s policies and any relevant state or federal laws to understand their specific rights and entitlements regarding gap pay.

Employers establishing or reviewing gap pay policies must ensure they align with all applicable labor laws and non-discrimination regulations. Clear and consistent policy development helps manage employee expectations and fosters a supportive work environment. This proactive approach helps employers comply with legal obligations while providing financial support to their employees.