Gross pay is the total amount of remuneration paid to an employee. It is paid out through the payroll system. Gross pay includes all of the following:
- Wages and salaries (wages are based on an hourly rate, and salaries on an annual rate)
- Piece rate pay
- Shift differentials (a small additional amount paid to those working the second or third shift)
- Sick pay
- Vacation pay
- Holiday pay
Gross pay is the total amount of remuneration before taxes and other deductions are removed. If these items are taken out, then the remainder is referred to as net pay. Examples of the types of deductions that may be subtracted from gross pay include social security, Medicare, garnishments, health insurance, dental insurance, life insurance, pension contributions, and charitable contributions.
For example, Mr. Smith works 40 hours at an hourly rate of $15, and earns an additional $1 per hour because he is working the second shift. He also works ten hours of overtime at time-and-a-half (which incorporates the $1 shift differential). Therefore, his gross pay is calculated as:
Base wages = 40 hours x $15 = $600
Shift differential = 40 hours x $1 = 40
Overtime = 10 hours x $24 = $240
Gross pay = $880
If (for example) 20% were then deducted from the $880 of gross pay for income taxes, as well as $100 for medical insurance, the net pay would be $604.