Gross pay is the total amount of money that the employer pays in wages to an employee. Gross pay is computed based on how an employee is classified by his or her organization.
An hourly or nonexempt employee is paid by multiplying the total number of hours worked by his or her hourly rate of pay. The nonexempt employee's paycheck may also include payments for overtime, bonuses, reimbursements, and so forth.
The exempt or salaried employee is paid gross pay based on the amount of his or her annual salary divided by the number of pay periods in a year, usually 26. For example, a salaried employee who makes $40,000 per year is paid by dividing that $40,000 by the number of pay periods in a year. In the example, the employee would receive 26 paychecks that each total $1538.46. Any reimbursements, bonuses, or other payments would also be added to gross pay.
In addition to the required payroll deductions for taxes, Medicare and Social Security, the employer also subtracts voluntary deductions from an employee's gross pay.
Voluntary deductions to gross pay can include such items as charitable contributions and the employee's required contribution to the employer's healthcare insurance coverage. Any court ordered garnishment, whether voluntary or required by law, is also subtracted from an employee's gross pay.
The resulting paycheck, after all of the required and voluntary deductions are subtracted, is called net pay. Learn more about net pay.
Because the US tax laws are confusing, you might also want to talk with your state Department of Labor and / or an employment law attorney when you venture down the road of hiring employees. Your business accounting firm is also another expert in matters relating to payroll taxes and deductions.
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