Gross Pay: Wages, Salaries, Overtime, and Pretax Earnings in Payroll Accounting

What “Gross Pay” Means in Payroll Accounting

Gross pay is the total amount of an employee’s earnings recognized for a pay period before any deductions (taxes, benefits, garnishments) are taken out. Conceptually, gross pay answers: “How much did the employee earn this period based on compensation arrangements and recorded earning events?”

Gross pay is built from one or more earnings components (regular wages, overtime, bonuses, etc.). Payroll systems typically calculate gross pay by adding each earnings category amount for the pay period.

1) Hourly Wages vs. Salary: Converting to a Pay-Period Amount

Hourly wages

Hourly employees are paid based on an hourly rate multiplied by eligible hours in each earnings category. The pay-period gross pay is usually the sum of:

• Regular hours × regular rate
• Overtime hours × overtime rate (often expressed as a multiple of the regular rate)
• Other earnings (shift differential, commissions, bonuses, PTO paid, etc.)

Conceptual formula (hourly):

Gross pay = (Regular hours × Regular rate) + (OT hours × OT rate) + Other earnings

Salaried pay

Salaried employees are paid a fixed amount tied to an annual salary (or monthly salary), then converted to the pay-period amount based on the organization’s pay frequency. A common conversion is:

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• Annual salary ÷ number of pay periods per year

Conceptual formula (salary):

Pay-period salary = Annual salary ÷ Pay periods per year

For payroll accounting, the key is that the pay-period salary is the earnings recognized for that period (subject to any additional earnings like bonuses or commissions that may be added on top).

Quick pay-frequency reference

Practical note: Some payroll systems round to cents each period. Small rounding differences are normal and typically handled through standard payroll rounding settings.

2) Common Earnings Elements Included in Gross Pay

Payroll earnings are often organized into categories (sometimes called earnings codes). Each category has its own inputs (hours, rate, or flat amount) and calculation method.

Regular time (regular wages)

What it is: Pay for standard working time at the employee’s base rate.

Typical inputs: regular hours, regular rate.

Regular pay = Regular hours × Regular rate

Overtime

What it is: Pay for hours designated as overtime under the employer’s policy (and applicable rules), paid at a premium rate.

Typical inputs: overtime hours, overtime multiplier (e.g., 1.5×), regular rate.

OT rate = Regular rate × OT multiplier (e.g., 1.5)

Overtime pay = OT hours × OT rate

Accounting perspective: Overtime is still wage expense; it is simply a different earnings category that increases gross pay.

Shift differential

What it is: Additional pay for working certain shifts (night shift, weekend shift), often expressed as an extra amount per hour.

Typical inputs: differential hours, differential rate (e.g., $2/hour) or percentage premium.

Shift differential pay = Differential hours × Differential rate

How it appears in gross pay: It is added to regular and overtime earnings as a separate line item or embedded into an adjusted rate, depending on system setup.

Commissions

What it is: Variable earnings tied to sales or performance measures, often calculated as a percentage of sales or a flat amount per unit.

Typical inputs: commission base (e.g., sales), commission rate, or a flat commission amount approved for payroll.

Commission = Sales × Commission rate

Payroll processing note: Commissions are frequently paid in a later pay period after sales are validated; they still become part of gross pay in the period they are paid.

Bonuses

What it is: One-time or periodic additional earnings (performance bonus, signing bonus, retention bonus).

Typical inputs: approved bonus amount (flat).

Bonus = Approved bonus amount

Accounting perspective: Bonuses are compensation expense when paid (or accrued, if your accounting process accrues them), and they increase gross pay in the pay period they are included on payroll.

Paid time off (PTO) paid as earnings

What it is: Pay for time not worked but compensated (vacation, sick time, holiday pay), recorded as paid hours.

Typical inputs: PTO hours paid, PTO rate (often the employee’s base rate).

PTO pay = PTO hours × PTO rate

Important distinction: PTO taken affects time records; PTO paid affects gross pay. Payroll accounting focuses on the paid earnings recognized in the pay period.

3) What Is and Is Not Included in Gross Pay (Accounting Perspective)

Gross pay includes amounts that are compensation for services (time worked or paid leave) and other earnings treated as wages/compensation by the employer’s payroll policies and accounting classification.

Typically included in gross pay

• Wages and salaries (regular pay)
• Overtime premiums
• Shift differentials
• Commissions and bonuses when paid through payroll
• PTO paid (vacation, sick, holiday) when paid through payroll
• Other taxable/compensatory earnings processed via payroll (e.g., certain allowances treated as wages under company policy)

Typically not included in gross pay

Some payments flow through payroll or accounts payable but are not “earnings for services” in the same way. From an accounting perspective, these are often classified differently than wage expense and are not part of gross pay.

• Expense reimbursements (e.g., mileage reimbursement, travel reimbursement) when they are true repayments of business expenses rather than compensation
• Employer-paid vendor payments made directly to third parties (e.g., paying a training vendor directly) rather than paying the employee as wages
• Repayments/returns (e.g., employee returning an advance) which reduce a receivable or clear an advance balance rather than represent earnings

How to decide: a practical classification checklist

• Is it pay for services? If yes, it generally belongs in gross pay.
• Is it a repayment of a business cost the employee incurred on behalf of the company? If yes, it is generally a reimbursement, not gross pay.
• Is it processed as an earnings code in payroll? If yes, it will usually appear in gross pay; confirm the intended accounting classification.
• Does it increase wage expense? If it increases wage expense, it is part of gross pay; if it increases travel/meal/supplies expense, it is likely not.

Example (conceptual): An employee receives $200 for a documented hotel receipt (reimbursement). That $200 is typically recorded as travel expense (or reimbursable expense) and does not increase gross pay. If the employee receives a $200 “allowance” not tied to receipts and treated as compensation, it may be set up as an earnings code and included in gross pay.

4) Worked Examples (Simple Numbers, Inputs → Outputs)

Example A: Hourly employee with overtime, shift differential, and PTO

Scenario inputs (one weekly pay period):

• Regular rate: $20.00/hour
• Regular hours worked: 38
• Overtime hours: 4
• Overtime multiplier: 1.5×
• Shift differential: $2.00/hour for 10 of the regular hours
• PTO paid: 2 hours at $20.00/hour

Step 1: Regular pay (base)

Regular pay = 38 hours × $20.00 = $760.00

Step 2: Overtime pay

OT rate = $20.00 × 1.5 = $30.00/hour

Overtime pay = 4 hours × $30.00 = $120.00

Step 3: Shift differential pay

Shift differential = 10 hours × $2.00 = $20.00

Step 4: PTO pay

PTO pay = 2 hours × $20.00 = $40.00

Step 5: Gross pay (sum of earnings categories)

Gross pay = $760.00 + $120.00 + $20.00 + $40.00 = $940.00

What to notice: The calculation is driven by clear inputs (hours, rates, multipliers, flat add-ons). Gross pay is simply the total of all earnings lines for the period.

Example B: Salaried employee with a commission and a reimbursement (what counts in gross pay)

Scenario inputs (biweekly pay period):

• Annual salary: $78,000
• Pay frequency: Biweekly (26 pay periods/year)
• Commission approved for this pay period: $500
• Travel reimbursement submitted with receipts: $180

Step 1: Convert annual salary to pay-period salary

Pay-period salary = $78,000 ÷ 26 = $3,000.00

Step 2: Add commission (earnings)

Salary + commission = $3,000.00 + $500.00 = $3,500.00

Step 3: Evaluate reimbursement (not earnings)

The $180 travel reimbursement is a repayment of business expenses, not pay for services. It may be paid alongside payroll, but it is typically not included in gross pay as an earnings category.

Outputs:

• Gross pay: $3,500.00
• Plus reimbursement paid (separately classified): $180.00
• Total cash paid to employee (if paid together): $3,680.00

What to notice: Payroll outputs can include both earnings and non-earnings payments. Gross pay is the earnings total; reimbursements are generally excluded even if they appear on the same payment.