Definition: Gross pay, often called gross wages, is the total compensation earned by each employee. Notice I didn’t say it was the total amount paid to each employee. Gross pay typically consists wages, salaries, commissions, bonuses, and any other type of earnings before taxes and related deductions are taken out of it.
What Does Gross Pay Mean?
You may have noticed that your actually pay check is way less than what you are supposed to be earning. Well, the amount on your paycheck is considered the net pay for the payroll period. If you look at your paystub, you’ll see the gross pay usually listed at the top. This number equals your total salary or hourly wages times the number of hours worked during the period.
The gross pay is then reduced by FICA taxes, income tax withholdings, employee portion of health insurance premiums, retirement contributions, charitable contributions, and a list of other types of deductions. After all of these deductions are taken out of your pay, your paycheck is written out for the net amount.
I know. This can be kind of depressing.
Employers usually account for the gross pay by debiting the payroll expense account and crediting cash. Even though the employee won’t personally receive this money, it is technically given to the employee and then held by the company to remit to the appropriate entity.
For example, the FICA and income taxes are withheld and remitted to the federal government. The health insurance premiums and retirement contributions are held and remitted on behalf of the employee to the companies controlling these plans. I know it’s kind of weird concept, but the money is theoretically given to the employee and then held by the company.
As such, the company creates a liability on its books until the payments are remitted because the money actually belongs to the employee.