What Is Gross Pay and How Is It Calculated?

Gross pay is the total amount of money an employee earns from their employer before any deductions are taken out. It represents the full compensation received for work performed during a specific pay period.

Understanding Gross Pay

For hourly workers, this is calculated by multiplying the total hours worked by their hourly rate. For example, if an employee works 40 hours at $20 per hour, their gross pay for that week would be $800. Salaried employees typically have a fixed annual salary, which is then divided by the number of pay periods in a year to determine their gross pay per period.

Beyond regular wages or salary, gross pay also encompasses additional earnings. This can include overtime pay, which is 1.5 times the regular hourly rate for hours worked beyond 40 in a workweek, as mandated by the Fair Labor Standards Act (FLSA). Commissions earned from sales, performance-based bonuses, and tips received are also part of gross pay. Other forms of compensation, such as holiday pay, sick pay, or certain taxable fringe benefits, are also included.

Gross Pay Versus Net Pay

Gross pay differs significantly from net pay, often referred to as take-home pay. Net pay is the amount an employee actually receives after all deductions are subtracted from their gross pay. These deductions can be categorized as mandatory or voluntary.

Mandatory deductions include federal income tax, withheld based on information on Form W-4. Social Security and Medicare taxes (FICA taxes) are also withheld. For 2025, employees contribute 6.2% of their wages up to $176,100 for Social Security and 1.45% for Medicare, with no wage limit for Medicare. Depending on where an employee lives and works, state and local income taxes may also be withheld. Voluntary deductions, chosen by the employee, can include health insurance premiums, contributions to retirement plans like a 401(k), and other benefits such as union dues or charitable contributions.

Why Gross Pay Matters

Gross pay serves as a foundational figure for various financial calculations. It is the basis for calculating many tax withholdings, including federal, state, and FICA taxes. For instance, the Social Security Administration uses an individual’s gross pay history to determine future Social Security benefits.

This figure is also important when applying for loans or credit. Lenders assess an applicant’s gross income to determine their repayment capacity and eligibility for a loan. A higher gross income can lead to approval for larger loan amounts and more favorable interest rates. Understanding one’s gross pay provides a comprehensive view of total compensation, aiding in overall financial planning and budgeting.