What Is Gross Income?
Also called gross pay or gross amount, an individual's gross income includes all income sources—not just hourly wages or an annual salary. For instance, an individual might earn money by working for a company but also receive income from capital gains, pensions, interest, and rental properties.
Why Gross Income Matters
Gross income is the starting total employers use to calculate the correct amount to withhold federal and state income taxes, Social Security, Medicare, and other deductions.
If an employee doesn't withhold enough, the missing amount (along with a possible tax penalty) will need to be paid over the months ahead. On the other hand, if an employee over-withholds, they may request a refund or file an amended tax return. Either way, a mistake usually results in extra paperwork and can take time to correct.
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What Is the Difference between Gross Income and Net Income?
In contrast, net income (or net pay) is the amount of money the individual actually takes home after their employer applies the appropriate deductions and withholdings (Gross Income − Deductions = Net Income).
What Is Included in Gross Wages?
The majority of an employee's gross wages typically consists of their base pay, such as their salary, hourly pay, or tips (for tip-based workers). Additions to gross wages may also include, but aren't limited to:
How Do You Calculate Gross Pay?
Employers can calculate the gross wage for hourly and salaried workers on a quarterly, monthly, weekly, or daily basis—or for any other period they desire.
Below are different scenarios for calculating gross income. However, it may be most convenient to use a total gross wages calculator since calculating the wages possible in any given scenario can be complicated.
How to Calculate Gross Income for Hourly Workers
Multiply the number of hours worked by the employee’s hourly wage to figure out how much their earnings add up to each pay period. For example, a full-time hourly employee who works 40 hours per week at $12 per hour would earn the following:
40 hours x $12 per hour = $480 in gross wages per week
Under the Fair Labor Standards Act (FLSA), a non-exempt employee who works overtime is entitled to 1.5 times their regular hourly rate for every hour that exceeds the 40-hour workweek. If the full-time employee from the above example worked 5 hours more that week, here's how to calculate their gross pay with overtime:
- $12 regular wage rate x 1.5 = $18 overtime rate
- 5 overtime hours x $18 per hour = $90 in overtime pay
In this case, their total gross pay for the week would be $570 ($480 in straight-time pay + $90 in overtime pay).
How to Calculate Gross Income for Salaried Employees
Unlike hourly workers, salaried employees are generally not entitled to overtime pay. If you wanted to calculate an employee’s monthly gross income, for example, simply divide their annual salary—plus any additional sources of income—by 12. For instance, if an employee makes $55,000 per year, their gross income per month would be about $4,583.
Let’s look at another example that includes salary, a bonus, and advertising sales:
Anya works for a marketing firm as an influencer. Her annual salary is $25,000 and she gets paid twice a month. During the last pay period, she earned a $500 bonus and $1,000 in advertising sales. Anya’s paycheck reflects $2,452 in gross wages. Here's how that figure breaks down:
($25,000 salary / 24 pay periods) + ($500 bonus + $1,000 advertising sales) = $2,542
How to Calculate Gross Income for Unemployment
Unemployment benefits are considered gross wages (and are taxable) because they partially replace lost wages due to being laid off from a job. Benefits parameters and taxes vary by state, so it would be best to use an interactive unemployment benefits calculator or your state's online unemployment insurance chart (if available) for an estimate.
Let’s say Julio is an IT specialist in Iowa who has 3 dependents. He earned $100,000 last year in gross income ($25,000 per quarter between July 2022 and June 2023) before he was laid off due to downsizing. According to this weekly unemployment benefits calculator, he may be eligible for 16 weeks of unemployment benefits at up to $659 per week.
What Is Federal Taxable Income?
Employees may look at their paychecks and see two numbers for gross income: gross income and federal taxable income. The latter is usually the lower amount. This is because some of the money withheld from a paycheck isn't subject to tax. Some examples of pre-tax deductions include health insurance premiums and contributions to a 401(k), health savings account (HSA), or flexible spending account (FSA).
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A good start to improving the right kind of retention is to make sure you’re paying fairly and competitively to the market. In fact, research shows a link between fair and transparent pay practices, lower intent to leave, and overall greater job satisfaction.
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