Taxes. Benefits. Retirement. Dozens of factors affect how much you actually make as a contractor. And these factors define the difference between your gross pay and take-home pay.
Gross pay is the total amount you earn before taxes and benefits. But your take-home pay is the money you get to keep. Understanding this distinction helps you understand what you make and budget accordingly.
Here’s how to find gross pay and why it matters.
Gross Pay Explained
Gross pay has a few different names. So what are gross wages, gross income, and gross pay, exactly? Put simply, gross pay is the amount of money you make before taxes, insurance payments, and other deductions.
For example, if someone’s gross pay is $2,000 per pay period but their paycheck is $1,600, that means $400 was deducted.
So, why does gross pay matter for contractors? It helps you paint a realistic picture of your earnings. If you charge a client $5,000 for a project, you don’t make $5,000. You make $5,000 before taxes and other deductions, which could make your total less than expected.
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Gross Pay Components
Gross pay includes more than your base rate or salary. It can also include other types of compensation, like:
- Overtime Pay. If you work more than what’s outlined in your contract or employment agreement, you can get overtime pay. This is usually 1.5 times your regular hourly rate.
- Bonuses. Some employers or clients pay bonuses when you meet certain goals or do a particularly good job.
- Commissions. People who work in sales or other commission-based roles may earn a percentage of the sales they make.
- Tips. For employees who earn tips, such as servers or bartenders, their tips are part of their gross pay. Employers must report tips to the IRS and include them in the employee’s gross pay calculations.
- Piece Rate Pay. Some people get paid based on the number of units they produce or tasks they complete.
- Paid Time Off. If an employee takes vacation days or sick days and gets paid for that time off, that money gets included in their gross pay.
- Holiday Pay. Some employers or clients offer extra pay when you work on holidays.
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Gross Pay Versus W-2 Pay: Are They the Same?
As mentioned, gross pay is your total earnings before deductions. Your W-2 is a tax form that shows your total earnings for the year, including wages, tips, and other taxable benefits. This is the amount your employers report to the IRS.
Your gross pay might be higher than the amount that ends up on your W-2. That’s because some deductions, like health insurance premiums and 401k contributions, are removed before taxes. The W-2 number, which is the one you report to the IRS, is lower because of those deductions. The crucial difference between W-2 and gross pay is that some types of compensation may not appear on your W-2 because they’re not taxable.
If you’re a contractor, you don’t have to worry about filing W-2s. Employers file these forms for employees, so when you aren’t an employee, you don’t have to worry about it. Instead, you file taxes as an independent contractor and make any deductions on your own. If a client pays you more than $600, they have to file a 1099 form for you.
If you employ people and deduct income, Social Security, or Medicare taxes, you need to complete and file W-2 forms for them during tax season.
How To Calculate Gross Pay: Step-By-Step
Here’s the gross pay formula for hourly and salaried contractors.
Hourly Contractors and Employees
Here’s how to calculate gross pay if you earn an hourly rate:
- Determine the Hourly Rate. This is the amount of money you earn for each hour you work.
- Track Hours Worked. Keep track of the total number of hours you worked during the pay period. This might be two weeks, a month, or a quarter.
- Multiply Them Together. Multiply your hourly rate by the number of hours you worked.
Let’s say you earn $15 per hour and work 40 hours in a week. The equation would be: $15 x 40 hours = $600.
Salaried Employees
Here’s the process if you earn a salary or want to calculate your annual income:
- Determine Your Annual Salary. Start by finding the total amount you earn in a year.
- Divide by the Number of Pay Periods. Divide the total annual income by the number of pay periods in a year. This gives you your gross pay per pay period.
Let’s say you earn $52,000 per year and get paid bi-weekly (every two weeks). This means there are 26 pay periods in a year. To calculate your gross pay per pay period, divide your yearly salary by the number of pay periods: $52,000 / 26 = $2,000. Your gross pay for each two-week pay period is $2,000.
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3 Gross Pay Deductions To Consider
Understanding your income isn’t just about knowing gross pay. You also need to know how much you’ll pay in taxes and deductions later. Deductions define how much cash you actually take home as a contractor. Some are required by law, while others are voluntary and depend on your situation.
Here are some common mandatory deductions:
- Federal Income Tax. This is a tax that the federal government collects from your income. The amount depends on your income level.
- State Income Tax. Most states also deduct income tax from your paycheck. The amount varies by state and income level.
- FICA Taxes. FICA stands for Federal Insurance Contributions Act. These taxes support Social Security and Medicare. The rates vary by year, so check how much you owe before you file your taxes.
Make Collecting Payments the Most Efficient Part of Your Business
Making money as a contractor starts with collecting payments from clients. And that can be a long, frustrating process.
Joist makes it easy to accept credit card payments from your clients. Simply issue your invoice, switch on Payments, and get paid. You’ll cut cash flow delays, spend less time asking for payments, and be able to collect down payments on-site. Choose Joist today.