In the following article, we will take a detailed look at the gross salary and common removal for employers. Before knowing how hourly and salaried gross pay is calculated, you have to know what gross salary is. Let’s have a look on the entire topic.
What is the gross salary?
Gross salary, also known as gross pay or you can say total earnings too. So, basically, the total amount of money an employee earns before any deductions is called gross salary. It shows the totality of the employee’s compensation package before the employer makes deductions such as taxes, social security contributions, health insurance premiums, and other improvements.
Components of gross salary:
- Base Salary: This is the fixed, regular amount of money an employee receives per pay period (e.g., monthly, bi-weekly) according to their employment contract.
- Commissions (If Applicable): Earnings based on sales performance or achieving specific targets.
- Bonuses: If you do work by exceeding your target then the company will give you bonuses.
- Overtime Pay: You will get paid for working extra then the standard work hours, usually at a higher rate.
Don’t miss out! Check our previously published article on Is it Commonplace to take a Pay Cut when going to Salary?
How to calculate gross salary?
The process of calculating gross salary totally depends on the certain components that form an employee’s compensation. Here’s a breakdown for common scenarios:
Scenario 1: Fixed Salary
The gross salary is the base salary amount laid down in the employment contract of the employees who have a fixed salary every month.
Scenario 2: Salary with Bonuses or Commissions
Employees who earn commissions or bonuses in extra with respect to a base salary, their gross pay can be calculated as:
Gross Salary = Base salary + Commission earned (or) Bonus amount
Scenario 3: Salary with Overtime
Employees who qualify for overtime pay:
- Calculate overtime hours: Regular work hours each week and usually the standard work hours is confined to 40 hours.
- Calculate overtime rate: Typically 1.5 times the base hourly rate (check employment contracts or local regulations).
- Calculate overtime pay: Overtime hours worked x Overtime rate
Gross salary = Base salary + Overtime pay
Scenario 4: Combined Scenarios
For employees who got base salary with commissions or bonuses, and overtime too :
Gross salary = Base salary + Commission earned (or) Bonus amount + Overtime pay
Additional Considerations
If your company offers allowances including housing, transportation, etc, in the employment contract then include them to the base salary to work out the gross salary.
Tax Implications: Keep in mind that gross salary does not factor in tax deductions or other withholdings, which are subtracted to arrive at the net salary (take home pay).
Example:
Let’s suppose an employee gets a monthly base salary of $6,000 monthly, a commission of 10% on $10,000 in monthly sales, and works 5 hours overtime at a time-and-a-half rate (base hourly rate = $25).
Commission earned = $10,000 * 10% = $1,000
Overtime rate = $25/hour * 1.5 = $37.50/hour
Overtime pay = 5 hours * $37.50/hour = $187.50
Gross salary = $6,000 + $1,000 + $187.50 = $7,187.50
Calculating gross annual salary:
There are two major procedures to work out the gross annual salary, depending on how the employee is paid:
For salaried employees with a fixed monthly salary:
Gross annual salary = Monthly gross salary x Number of pay times per year
For employees who doesn’t have a fixed salary and get paid hourly, daily, or weekly:
Then work out the total gross pay per pay period. For instance, hourly rate x hours worked a week for weekly pay. Then multiply the gross pay per pay period by the number of pay periods per year. For more information, check our previously published article on Should i pay myself a salary from my llc.
Example 1: Fixed Monthly Salary
An employee receives a fixed monthly gross salary of $5,000. Assume that they are paid bi-weekly that is 24 pay periods a year, their gross annual salary would be:
Gross annual salary = $5,000/month x 24 pay periods/year = $120,000/year
Example 2: Hourly Wage
An employee earns an hourly rate of $30 and works 40 hours per week. They will get paid weekly, that is 52 pay periods a year. Let’s assume that they haven’t worked overtime hours this year.
Weekly gross pay = $30 per hour x 40 hours per week = $1200 a week
Gross annual salary = $1200 a week x 52 pay periods a year = $62,400 per year.
Don’t miss out! Check our previously published article on How to Calculate Retro Pay for Salary Employees.
Deductions from gross salary US and UK
The governments of the US and UK make deductions on various items from an employee’s gross salary before arriving at the net salary that is take home pay. Below some of the most common types of deductions in each country are mentioned:
United States (US)
Federal Income Tax: The federal government of the US imposes a progressive tax system. It means that the tax rates will increase with respect to increase in income levels. Employees usually have federal income tax deduct from each paycheck based on their filing status and approximated annual income.
State and Local Income Tax: Many states and localities impose their own income taxes. The amount that will get deduct totally depends on the particular state and locality.
Social Security and Medicare: The combined Social Security and Medicare tax rate is 7.65% (6.2% for Social Security and 1.45% for Medicare). Both the employer and employee contribute equally (each pays 3.825%).
Health Insurance Premiums: If the health insurance is mentioned in the contract of employment then some money for insurance will get deducted from the employee’s paycheck.
United Kingdom (UK)
Income Tax (PAYE – Pay As You Earn):
Like the US government, the UK government also uses an income tax system. Income tax is deducted from the bank through the PAYE system, which means that employees will get the net salary after tax deductions.
National Insurance: National Insurance is a type of insurance in which the social security system provides many advantages including pensions, unemployment insurance, and healthcare. Unlike the US system, National Insurance is not a flat tax; the rate decreases as income increases, with a maximum threshold.
Student Loan Repayments: If an employee has remaining student loans, repayments may be deducted from their salary on their own.
Frequently asked questions
No, the basic salary does not include into employee pension contributions. It get deducted from the basic salary only as part of the payment calculations that will get the employee’s overall salary.
So basically, the fixed amount of income an employee earns per month before the deductions is known as basic monthly salary. For example, an employee earning an annual salary of £36,000 would see a monthly base salary on their pay slip equal to £3,000 (£36,000 annual salary divided by 12 months).
Conclusion
We discussed the gross pay and how are hourly and salaried gross pay calculated, now you have to know what is salary pay. We come across various factors on which gross pay depends. UK and US government also make deductions on gross pay from the source before giving it to the employees.
