Definition of Gross Wages
Gross wages are the amounts earned by employees before the payroll withholding taxes and other deductions are subtracted. Sometimes gross wages is used to describe the amounts earned by hourly-paid employees. However, it is common for gross wages to mean all forms of taxable compensation including wages, salaries, tips, commissions, bonuses, etc.
Gross Wages vs Net Wages
If an employee works 40 hours during the week of December 25-31 and earns $20 per hour, the gross wages earned are $800.
Net wages are an employee’s gross wages minus the deductions for payroll withholding taxes and other items. If the gross pay is $800 and the total payroll deductions amount to $200, the employee’s net wages will be $600. Net wages is also known as the net pay, take-home pay, and/or the amount that the employee “clears”.
How Gross Wages Are Reported
Under the What is the accrual basis of accounting?”>accrual basis of accounting, the employer will report on its financial statements the gross wages that were earned by the employees (and incurred by the employer) during the accounting period.
[Under the cash basis of accounting, the employer’s financial statements will report gross wages based on the amounts that were paid to the employees during the accounting period.]
The amount that the employer reports to the Internal Revenue Service on employee’s Form W-2 Wage and Tax Statement is the amount of the gross wages that were paid to the employee during the calendar year.
Example of Wages on Financial Statements vs W-2
Under the accrual basis of accounting, if an employee earns gross wages of $800 in the last week in December, the gross wages (and related amounts) are reported on the company’s December financial statements.
However, if the wages earned during the week of December 25-31 are not paid until January 5, the wages will be included in the W-2 form for the year in which they are paid.
