What is Gross Payroll & How to Calculate It [w/ Examples]

Gross payroll versus net payroll—can you tell the difference?

Identifying the difference between the two proves useful for your business in the long run.

Understanding what “gross payroll” means ensures you calculate all salary wages or earnings correctly, whether they have completed attendance for a given pay period or not, are entitled to specific benefits, or belong under different tax brackets.

Fortunately, you’ve come to the right place! This article will tell you everything you need to know about gross payroll and show you how to calculate it easily.

What is Gross Payroll?

Gross payroll refers to the total compensation that is earned by an employee—whether in the form of a salary or wage—in a given pay period before benefits, taxes, and other deductions are subtracted.

Accounting for the gross payroll will depend on the pay cycle used by the company, along with the employees’ hourly rates.

For example, a customer service representative has an hourly rate of $27.69. If they are paid monthly, then they earn a total of $4,800 in gross salaries per month.

It is essential to follow the set payroll cycle within the company in calculating employees’ gross earnings to accommodate all the work hours they have renderedin a given pay period.

Gross Payroll vs. Net Payroll

The net pay is the total amount of earnings that employees receive after taxes, benefits, mandatory garnishments, and all other types of deductions are subtracted from their paychecks. It is also known as take-home pay.

The take-home pay provides employees with proof that their benefits and taxes are properly accounted for.

On the other hand, the gross payroll is often used as a basis by companies in determining salary offers and negotiations with job applicants for a particular position. It also serves as the foundation for calculating salary increases and performance-based bonuses.

Both the gross and net payroll are the employer’s responsibilities. Employers are obligated to cover their share of FICA taxes, employer-sponsored insurance, and retirement benefits and include employees’ withholding taxes in their accounting process.

What is Deducted From Gross Payroll?

An employee’s gross payroll deductions consist of both mandatory and voluntary deductions.

Mandatory Deductions

• Federal income tax. This type of tax is enforced by the IRS on companies, legal entities, organizations, and individuals’ capital gains, salaries, and wages.
• State income tax. The state income tax is highly similar to the federal income tax. The only difference is that it is the state authorities imposing it on their governing areas.
• FICA. FICA (Federal Insurance Contribution Act) consists of employees’ Medicare and Social Security taxes. Employers and employees share a 2.9% tax rate in paying for Medicare tax and 12.4% tax rate for Social Security.
• FUTA. Also called unemployment insurance, FUTA (Federal Unemployment Tax) seeks to fund the unemployment program of the federal government.
• SUTA. Also known as State Unemployment Tax, SUTA is the state-wide version of FUTA. SUTA regulations and rates differ per state.
• Workers’ compensation insurance. Companies employing three or more staff members are required to cover workers’ compensation insurance to help fund employees’ death benefits, vocational rehabilitation, and medical expenses.
• Wage garnishment. Wage garnishments may be court-mandated or regulated by the IRS. It may include loan defaults (such as student loans or outstanding tax debts), alimony, or child support.

Voluntary Deductions

Employees can choose whether to have voluntary deductions as additional withholdings from their paychecks or not.

• Group term life insurance (GTL). Employers often offer this on top of other existing health insurance benefits, covering up to the $50,000 limit to not accrue tax consequences. Anything beyond $50,000 in GTL coverage will be included in the employee’s FICA.
• Retirement benefit. Different employers offer different types of retirement coverage. Roth Individual Retirement Accounts (IRA) and 401(k) are two of the most common types of retirement plans.
• Health and life insurance premiums. They cover dental, vision, and medical coverage for employees.
• Union dues. Union dues usually take up about 1-2% of gross employee earnings. Companies are mandated to withhold union dues from employee salaries and forward them to the employee’s union.

How to Calculate Gross Payroll for Salaried Employees

Salaried employees are employees who receive a fixed compensation regardless of the number of work hours rendered in a pay period. Even if they did not complete a 40-hour work week, they are still entitled to their full salary.

However, if a salaried employee takes time off from work either by using sick or personal leave, then the necessary deductions may be applied to their salary.

Here’s a sample computation for a salaried employee’s gross payroll:

A systems administrator earns an average annual salary of $79,500. Using their annual rate, we calculate their gross pay on different pay cycles. Each pay cycle differs in terms of the number of pay periods in a year:

All you have to do is divide the annual salary by the number of pay periods per cycle.

Weekly pay cycle: $79,500 / 52 = $1,528.85 gross weekly salary

Biweekly: $79,500 / 26 = $3,057.69 gross biweekly salary

Semi-monthly: $79,500 / 24 = $3,312.05 gross semi-monthly salary

Monthly: $79,500 / 12 = $3,057.69 gross monthly salary

Overtime

There are two ways to calculate overtime in a salaried employee’s gross payroll:

• #1. Fluctuating approach
• #2. Fixed approach

#1. Fluctuating Approach

A fluctuating approach means an employee is paid fixed rates regardless of the number of hours they worked on a given week.

For example, a Customer Service Representative earns $1000 on a 40-hour week. In this particular week, they rendered extra 10 hours worth of overtime work. Hence, they have amassed a total of 50 work hours.

To calculate the overtime pay, you should:

1. Divide the weekly 40-hour rate by the number of weekly hours worked ($1000 / 50 = $20).
2. Multiply $20 by 1.5 ($20 X 1.5 = $30 overtime rate).

#2. Fixed Approach

In a fixed approach, the employee’s salary applies to a fixed number of hours per week.

Using the same example you used for the fluctuating approach, all you have to do is divide the weekly rate by the number of hours per week ($1000 / 40 = $25 overtime rate).

How to Calculate Gross Payroll for Hourly Employees

Hourly employees are paid according to the number of hours they’ve completed. They are also entitled to the federal minimum wage and overtime pay.

Typically, they are paid overtime if they exceed 40 hours of work in a week. Their overtime rate is one and a half times their normal rate.

They may also be paid monthly, biweekly, weekly, or daily, so let’s explain how to calculate the gross payroll for hourly employees.

For example, a data entry clerk makes $12.06 per hour. To determine the weekly, biweekly, and monthly gross pay, simply multiply the hourly rate by the number of work hours completed for each pay cycle.

Use the table below as your guide:

Having this in mind, here’s what the equations look like:

Weekly gross pay: $12.06 X 40 hours a week = $482 weekly gross pay

Biweekly gross pay: $12.06 X 80 hours a week = $964.8 weekly gross pay

Biweekly gross pay: $12.06 X 160 hours a week = $1,929.6 weekly gross pay

Final Thoughts

Understanding the difference between gross payroll and net payroll, along with knowing how to calculate the former, is crucial in any payroll or human resources department.

It helps guarantee that employees receive salaries and wages according to the number of hours they’ve put in to complete their tasks. In turn, it also means employers disburse the correct net pay into their employees’ accounts.

Key Takeaways

• Gross payroll refers to the total earnings of an employee before taxes, benefits, and other deductions are applied.
• Net payroll refers to the take-home pay of an employee—the total amount of earnings they receive after taxes, benefits, and other deductibles are subtracted from their gross pay.
• Gross pay and overtime pay should be calculated according to the pay cycle followed by the company.
• In computing an employee’s gross earnings, it is important to consider whether they are salaried or hourly employees.
• Salaried employees are paid a fixed salary regardless of the number of work hours completed in a pay period. Hour employees are paid per hour.